Sunday, January 9, 2011
US regional banks set for consolidation
Source: FT.com
By Suzanne Kapner in New YorkThe US regional bank sector looks set for consolidation in 2011, prompted by billions of dollars in soured commercial real estate loans clogging balance sheets.
So far, banks have avoided writing down these loans by extending their maturity dates. But with $1,500bn of commercial real estate loans coming due over the next four years - half with mortgages in excess of current property values - such evergreening may be reaching a tipping point, analysts say.
"Banks have been extending these loans, but the question is: how long can they do this for?" asks Paul Miller, of Friedman, Billings, Ramsey, an investment banking and research firm.
The 100 largest banks by assets have an average of one-quarter of their loan portfolios tied up in commercial real estate, according to Scott Siefers of Sandler O'Neill. The percentage is even more concentrated for the smaller community banks that make the lion's share of property loans.
Topping the list is PacWest Bancorp, a San Diego, California-based lender with just $5.7bn in assets that has two-thirds of its overall loans in commercial real estate.
By contrast, the stronger and larger regional banks, such as PNC Financial and Fifth Third Bancorp, have less than 15 per cent of their loan portfolios in commercial real estate, and the ratio drops to less than 5 per cent for large banks such as JPMorgan Chase and Citigroup.
Michael Zaremski, an analyst with Credit Suisse, estimates that in California, almost a quarter of all banks have non-performing asset levels that are twice the national average, largely as a result of bad real estate loans that will depress shareholder returns for years to come.
"To solve that problem, you will see more banks sell themselves," Mr Zaremski says.
Bad real estate loans are already playing a role in M&A activity. CapitalSource Financial, based in Chevy Chase, Maryland, recently hired JPMorgan Chase to advise it on a potential sale, according to a person familiar with the situation.
The bank, with $9.5bn in assets, has 37 per cent of its loan portfolio tied up in commercial real estate, according to Mr Siefers. CapitalSource declined to comment, but it has said it has adequate reserves to cover its exposure to commercial real estate.
Another potential target is Synovus Financial, based in Columbus, Georgia, which has one-third of its $31bn in loans in commercial real estate. Mr Miller says the bank is vulnerable because of "elevated losses in its loan portfolio, which is most
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