In a move that could help the industry find a clearing price for troubled assets, Fifth Third Bancorp unloaded some of its bad real estate loans for a small profit last quarter.
The $48 million of loans were part of a $1.6 billion portfolio that had been marked down to 33 cents on the dollar last year. They were sold for an average of 35 cents on the dollar, letting the Cincinnati company book a gain of about $13 million.
Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc., said the sale could be a lesson for other banking companies considering selling assets, either on their own or through the government's Public-Private Investment Partnership, or PPIP.
"It tells you they got the mark about right to find a market-clearing price. That's the good news," Davis said. "The bad news is, that's a hell of a big mark. It was a huge writedown, and it speaks a lot about the marks the banking industry eventually is going to have to take."
Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC, said Fifth Third's loan sale has positive and negative implications.
"The positive, I guess, is, there is at least some liquidity out there. They were able to move some problem loans," Marquardt said. "The question is: At what price and how painful was it for them to exit" those loans?
One question hanging over PPIP — in which investors would buy troubled loans with funds borrowed from the government — is whether the assets will fetch high enough prices to get banks to participate. Several companies, including JPMorgan Chase & Co., have said they have no intention of selling through the program.
Ross Kari, Fifth Third's chief financial officer, said on a conference call Thursday that it is open to selling some of its held-for-sale loans or other distressed assets through the program. "PPIP should hopefully bring more buyers into the markets and hopefully support a little improvement in the prices" on assets, he said. "We're clearly looking at possibly using PPIP for those assets as well as some other distressed assets."
Late last year the $120 billion-asset company decided it wanted to sell the $1.6 billion of loans it had extended to home builders in western Michigan and Florida. It reclassified the loans as held-for-sale, marked them down to $473 million and booked an $800 million loss. The carrying value of the remaining loans is $403 million.
Fifth Third disclosed the asset sales Thursday in reporting a smaller-than-expected first-quarter loss of $26 million, or 4 cents a share, compared with a profit of $286 million, or 54 cents a share, a year earlier. The company said it paid $76 million in preferred dividend payments — including a payout to the Treasury Department, which bought $3.4 billion of Fifth Third preferred stock last year.