Banks, Returning To Health, More Willing To Sell Bad Loans

Two of the nation's largest regional banks said Thursday morning they took action last quarter to sell bad loans--a sign that banks have grown more willing to accept losses in cleaning up their balance sheets.

While prices for bad loans--those unlikely to be paid back--have improved since the depth of the financial crisis, they haven't returned to levels that would allow banks to sell without a loss. Charges related to loan sales at BB&T Corp. (BBT) and Fifth Third Bancorp (FITB) initially spooked investors Thursday morning, sending the banks' shares down in pre-market trading.

But after Fifth Third's Chief Risk Officer Mary Tuuk explained the Cincinnati bank's strategy during a conference call with investors, the stock rallied; in midday trading it rose 2.5%, to $12.71, in a mixed market for bank stocks. BB&T's stock was down 1.77%, to 22.52, because investors continue to be concerned about the bank's troubled loans.

Investors such as private equity funds and real estate developers are willing to buy the loans at a discount because they hope to collect some of the principal or obtain the collateral, such as properties that can be developed or sold.

For the banks, taking a loss now is better than holding onto bad loans, and selling them will improve shareholder returns next year, Oppenheimer & Co. analyst Terry McEvoy said. He expects more banks to follow BB&T and Fifth Third in the fourth quarter, which is traditionally a time when banks clean house.

Fifth Third said Thursday it sold $228 million in mortgages, mostly in Florida, and hopes to sell $1.2 billion of commercial loans. The bank took a $510 million charge related to the decision to sell the loans, which reduced its third quarter pre-tax profit by $175 million. The Cincinnati bank swung to a $238 million profit from a $97 million loss a year earlier.

BB&T, of Winston-Salem, N.C., said it sold $451 million in loans and foreclosed properties and has more than $350 million under contract. It put $1.3 billion of loans in its for-sale portfolio, which required a mark down of $321 million. The bank's profit rose 40% from a year earlier, to $219 million.

A smaller regional bank, Huntington Bancshares Inc. (HBAN), in Columbus, Ohio, sold nearly $400 million in impaired mortgages and home equity loans during the third quarter. The bank took charges of more than $75 million to liquidate the loans.

In the throes of the crisis, banks had been reluctant to sell soured loans because the cutthroat prices being offered would have hurt already weak capital at many banks. But banks are in much better shape now, which makes it easier for them to digest a hit to capital and earnings from loan sales. Fifth Third and BB&T were among the few to have previously sold bad loans.

Prices, meanwhile, have improved between 10% and 15% from a year earlier, said Kingsley Greenland, the Chief Executive of DebtX, which sells loans for banks and insurance companies.

Loan markets have "become more liquid," Fifth Third's Tuuk told investors, and the bank "determined that pricing has become more realistic relative to expected real estate values, workout costs and reasonable" returns.

Clarke Starnes, chief risk officer at BB&T, said during his bank's conference call, "the pricing for the [non-performing-loan] sales for the quarter were within our targeted range," about 55 cents on the original unpaid balance.

The pipeline for loan sales by banks for the fourth quarter is already much stronger than a year earlier, when loan sales were just starting to pick up, DebtX's Greenland said. His firm said Thursday it will sell $1.1 billion in commercial real estate and residential loans from nine banks and insurance companies by the end of the year.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

(Marshall Eckblad contributed to this article.)

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