Acquirer projections for losses in target loan portfolios in recent transactions
A broader look at markdowns in major acquisitions since the height of the financial crisis (see chart) shows that the recent estimates were indeed relatively severe, but at least it can be said that things have sometimes been worse.
M&T Bank Corp. reckoned that Wilmington Trust Corp. was about a third of the way through its lifetime losses of about 17% of its portfolio when it announced its deal for the Delaware banking company in November. The next month, Bank of Montreal put Marshall & Ilsley Corp. about halfway through its lifetime losses of about 21%. In January, Comerica Inc. estimated that Sterling Bancshares Inc.'s portfolio had absorbed about a quarter of an anticipated 16% in lifetime losses.
The recent marks are roughly in the range bounded by Wells Fargo & Co.'s acquisition of Wachovia Corp. and PNC Financial Services Group Inc.'s purchase of National City Corp., both in late 2008. (Gross loss projections are not the same as fair-value marks. Comerica estimated a pretax mark of $253 million on $330 million of losses after taking Sterling's allowance into account.)
As would be expected, marks in acquisitions of failed banks could be much higher. Popular Inc. recorded a fair value writedown equal to about half the book value of the loans it acquired in its April 2010 purchase of most of Westernbank Puerto Rico, the sharpest haircut among the group considered here. (Much of the writedown was offset by the asset Popular recorded to reflect its loss-sharing agreement with the Federal Deposit Insurance Corp.)
In a note last month, analysts with KBW Inc.'s Keefe Bruyette & Woods Inc. called marks on acquired loan portfolios "somewhat arbitrary," citing a tendency among buyers to make conservative assumptions and leave room for a boost to earnings in future periods if actual performance exceeds them.
Indeed, through the end of last year, Wells Fargo had released about $3.7 billion from an initial cushion of about $41 billion created to absorb losses on impaired Wachovia loans, after netting out incremental provisions made since the acquisition. Some of the amount released has already been recognized as income and the rest is due to flow through earnings over the life of associated loans.
Still, loan marks against failed banks naturally tend to be deeper than in traditional deals, and Wachovia and National City are poor company, particularly a year and a half after the economy began growing again.
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