Bankers that long focused on growth have a new goal: getting smaller.
The goal isn't universal, as some banks still see opportunities and are picking up the pieces their competitors are leaving behind. But much of the industry is slimming down.
"Growing in today's environment, at the same rate as what you're used to, is less profitable," said Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, pointing to
The slimming down is particularly prominent at banks with more than $100 billion of assets, which are preparing to comply with
Capital One Financial in McLean, Virginia, put $900 million of its commercial office loans up for sale. Citizens Financial in Providence, Rhode Island, said it would
At Cincinnati, Ohio-based Fifth Third Bancorp, executives said they're on an "RWA diet." In other words, they're reducing the company's risk-weighted assets as they bolster capital ratios ahead of the new Fed rules.
Regional banks aren't the only ones looking to get smaller. Banks "of all shapes and sizes" are seeing opportunities to exit certain businesses or sell some loans, said Terry McEvoy, a bank analyst at Stephens.
Banks may take a loss by selling loans below their original value, but getting rid of them earlier may also have benefits. For example, if a glut of office loans becomes available for sale, the properties' values may plummet, causing bigger losses among banks that waited to sell, McEvoy said.
"Those that are the first to exit may get the best price when it's all said and done, and we're not going to know that for quite some time," McEvoy said.
Banks are not retreating from all sectors equally. Big banks reported
Bank OZK, in Little Rock, Arkansas, is "cautiously optimistic about our continued growth prospects," CEO George Gleason said. Many of the bank's competitors "are shrinking and laying off some really good people," Gleason told analysts, giving the $30.8 billion-asset OZK a chance to pick up talent and gain new customers. Most of the bank's loans are in the real estate sector, particularly construction.
"We're putting on really great quality new assets and getting paid well for it," Gleason said. "So we view it as a very opportunistic time for growth."
Advisers who help banks buy and sell loans are busy.
"The market for selling loans is very vibrant," said Jon Winick, CEO of the bank advisory firm Clark Street Capital. He predicted there will be "a lot more selling" in the coming months.
In consumer banking, auto loan sales have been popular, and sales of home equity lines of credit are "on fire," said John Toohig, head of whole loan trading at Raymond James.
Banks that are selling their HELOC originations can do so "at a premium, which is hard to do these days," Toohig said. HELOCs are fetching good prices because other banks want the short-term, floating-rate loans. Those features balance out the 30-year mortgages sitting on banks' balance sheets, particularly mortgages they made during the pandemic boom when interest rates were at historic lows.
"It's very balance sheet-friendly for banks and credit unions," Toohig said. "They love to own it as a way to offset some of that 30-year fixed rate that's killing their margin."
There's also plenty of interest from banks in reducing their exposure to office buildings, whose values vary depending on their location, age and occupancy rate, as remote work becomes more popular.
Within the office sector, the main properties being sold right now are either "trophies" or "trash," Toohig said. Loans backed by newer properties with healthy occupancy trends can fetch good prices. Other loans are clearly "in the ditch," and banks are scrambling to figure out how to get them off their balance sheets, Toohig said.
Some lenders are also taking the opportunity to sell certain performing loans, as it gives them cash to pay off any borrowings they took on during this spring's banking turmoil.
Columbus, Georgia-based Synovus Financial, for example,
Hedge funds and private equity firms are willing to scoop up less attractive commercial real estate loans. But they'll only buy them at a steep discount, and some banks haven't yet accepted that their portfolios will fetch far less money than they'd like.
Banks may be willing to accept, say, 90 cents on the dollar for tarnished commercial real estate loans. The problem is that buyers are sometimes looking to buy riskier loans at just 60 or 70 cents, or even less.
"In a lot of cases, sellers just aren't there yet," Clark Street Capital's Winick said. "They have the desire to sell at some level, but they don't have the desire to sell at the market level."
That hesitancy could cost banks if property values fall further, or if an office building suddenly runs out of tenants, Winick said. While absorbing a big loss early is costly, so is waiting and taking a bigger charge-off later.
"Your first loss is always your best loss, or usually your best loss," Winick said. "I can give you a million examples where banks waited too long to move on a credit that was going sideways."
