Banking companies, saddled with fourth-quarter losses, are embracing markdowns on bad loans to move them off their books.
Fifth Third Bancorp said Thursday that it moved $1.8 billion of commercial real estate loans to held-for-sale status during the quarter, and that it is willing to sell them at 33 cents on the dollar.
Much of the banking sector had remained on the sidelines while waiting to see if the Troubled Asset Relief Program would buy bad assets — as originally planned but not pursued — and what the government would offer. That part of the ongoing bailout program is still uncertain, and in fact it has garnered a fair amount of support lately, but some bankers still want out of the loans now.
"Banks, I think, were relatively unwilling to mark to market," said Michael Blumenthal, a partner at the law firm Crowell & Moring LLP and an expert on the distressed loan market. "That's starting to unfreeze a little bit."
Fifth Third said that it has sold off about $177 million of the loans it has marked down, and that it is optimistic it can sell more. "We have found an active market for many of these assets," Kevin Kabat, Fifth Third's chief executive, said on an earnings conference call Thursday.
Mr. Kabat elaborated in an interview the same day, saying that to market the loans, Fifth Third is using a combination of national brokers to sell loans in bundles and regional brokers to handle one-off deals. More than 90% of the loans for sale involved overextended home builders in western Michigan and Florida, where real estate values have plummeted, he said. In determining which assets to unload, Fifth Third identified loans on which the cost of recovery did not match an estimated sale value.
Mr. Blumenthal said buyers of the marked-down loans include real estate developers, as well as hedge funds and private-equity investors willing to hold on in hopes that the loans come back.
Ross Kari, Fifth Third's finance chief, said he expects the process to take "several quarters" to complete. "It's a fairly long process to put them out to market. We don't want to rush into it and treat it as a fire sale."
Despite the pitfalls, Mr. Kabat said his company's best option was to "reduce the risk, accept the prices right now, and get it behind us."
Regions Financial Corp. said Tuesday that it sold loans, including some non-owner commercial real estate credits, at about 50 cents on the dollar in the fourth quarter. That is the same discount it offered in the third quarter, but Irene Esteves, Regions' chief financial officer, said on its earnings call Tuesday that during the latest quarter "we stepped up" a process of disposing of nearly $1 billion of nonperforming assets.
Regions took an average 51% markdown on the loans when sold or transferred to nonperforming status, Most of the $466 million of markdowns were included in net chargeoffs, the rest were included in noninterest expenses. In the third quarter $430 million of stressed assets were sold or moved to held-for-sale status. "We're trying to deal with some of our worst problem credits," said William Wells, the Birmingham, Ala., company's chief risk officer. "I would say quarter over quarter, a 50% mark is probably the best number to give as we're going through what we've seen."
Regions is seeking out "strategic investors," which will allow it to get away from having to offer a steeper discount, Mr. Wells said.
"We're going to continue to try to dispose of these assets that we have held for sale, and we've already taken our mark on those," he said. "So we think we'll have fairly good success. In fact, since the end of the quarter we've already sold about $15 million in property, and we have bids, I think, of about an additional $45 million. So we're continuing our process, but I will tell you, it will be impacted by what additional product will be coming to the market."
Others, like KeyCorp, did not disclose how low they were willing to go, but the Cleveland company said Thursday that it transferred $384 million of commercial real estate loans -- primarily loans to home builders — to held-for-sale status in June, and that it has been working down the portfolio. The balance stood at $133 million on Sept. 30 and $88 million on Dec. 31. During the fourth quarter about half of that runoff was marked at a loss. "We expect the commercial real estate portfolio to remain under pressure," KeyCorp CFO Jeffrey Weeden said on a call with analysts Thursday.
For some companies, the cost and complication of disposing of troubled assets in this fashion is too great.
"I know a lot of people are beginning to look at that strategy, you know, to see if you can sweep it out real fast. We've never really tried to do that and do not intend to do that now," Kelly S. King, BB&T Corp.'s CEO, said on its earnings call Thursday. (See related story.) "There are investors that will buy those properties today, but when we're looking at them, they are looking at 30% to 40% return rate in a 90-day period, and so the deep discount to generate that kind of return is enormous, and far greater than what we think is required."
Mr. Blumenthal said those willing to take a haircut will find substantial demand. But investors are only willing to buy such paper at significant discount to par: 50 cents on the dollar, and possibly much less, depending on the real estate market, he said.