Banks saw modestly better prices for troubled loans last quarter thanks to stronger demand from vulture investors, home builders and other buyers.
Regions Financial Corp. and Synovus Financial Corp. were two asset-shedding banks that got higher prices, suggesting that lenders may have been wise to avoid dumping their bad mortgages and business loans in fire sales last summer. If prices keep firming, asset sales could accelerate through 2010.
"If this pricing continues this way, you'll see more and more banks sell, especially those banks that have been recapitalized," said Chris Mutascio, a managing director with Stifel, Nicolaus & Co.
The pricing of so-called toxic assets has been one of the banking industry's most vexing problems through the financial crisis, and it's still tricky. But public disclosures and anecdotal evidence suggest that the billions of dollars of bad loans that banks have marked down the past two years are worth substantially more than they were a year ago, market watchers said.
"Before, it was like, I'll give you 10 cents on the dollar," said Adam Barkstrom, managing director with Sterne, Agee & Leach. "Now [pricing is] significantly more rational. It may not be where the banks want it, but it is significantly more rational."
Prices moved in the right direction late last year at Regions. Executives at the Birmingham, Ala., lender said in a conference call with analysts in January that it fetched 71 cents on the dollar for $510 million in problems loans it sold in the last three months of the year. A quarter earlier, problem loans fetched 66 cents.
"You're definitely seeing an upturn in prices," said Tim Deighton, a Regions spokesman. "The improving trends are a result of more reliable buyers as well as increased buyer competition around certain asset classes, particularly income-producing commercial real estate."
Synovus executives said last month that the Columbus, Ga., company sold $331 million of problem assets — mostly loans covering houses and lots in Georgia — for about 51 cents on the dollar. A quarter earlier it sold assets of $339 million at 46 cents. Synovus didn't return a call for comment.
Other companies that sold assets in the quarter reported higher demand, even though they didn't give any details on pricing.
BB&T Corp. CEO Kelly King said the Winston-Salem, N.C., lender's sales of foreclosed home loans rose 23% last quarter as "the market is improving some."
Marshall & Ilsley Corp. sold $143 million in construction and development loans and $70 million in single-family home mortgages. Mark Furlong, the Milwaukee company's CEO, said, "We saw some improvement in pricing this quarter, which is to be expected as real estate values begin to stabilize."
Asset prices seem to be rising for a few reasons.
Mutascio said the batches of bad residential and commercial loans that were sold earlier last year were simply discounted too steeply, as investors in distressed assets underbid banks that were in a hurry to shed them. For instance, Cincinnati-based Fifth Third Bancorp sold $48 million in real estate loans in the first quarter of 2009 for 35 cents on the dollar.
"I do think in the midst of the financial crisis, we threw some of the baby out with the bath water on the pricing of certain assets," Mutascio said. "The price of those distressed assets in quarters past was a bit more egregious than the losses we expected to see."
Gary B. Townsend, CEO of Hill-Townsend Capital LLC, said it comes down to simple supply and demand.
Banks aren't as desperate to shed bad loans as they were a year ago, now that profits are rising and losses are easing. Distressed investors, home developers, hedge funds and other investors interested in troubled assets, meanwhile, are willing to bid more now that the economy is no longer on the brink. They have also raised a lot of money that they are eager to put to work.
"I think sellers don't feel the same amount of pressure that they did a year ago, particularly if they feel that the prices might be better if they wait longer," he said.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said prices may be rising as liquidity floods the secondary loan market, but they are still depressed by historic standards, and banks, for the most part, are not aggressively selling loans.
"We're seeing better pricing, but it's not materially better from where we were last summer," he said. "The buyers, I think, are starting to improve their bids. Not much. And the sellers are realizing this is the reality."
Mutascio and Townsend both said that the rising prices validate the tepid response lenders had to the government's proposal last year to help finance and orchestrate the sale of banks' legacy loans.
"To the banks' credit, at least so far, their unwillingness to [sell] has been right," Mutascio said. "Their asset values are not as low as some of the vultures thought they were."