16.10.09

By Michael Acratopulo

Banks are behaving as expected

There is a feeling between surprise and frustration that more lenders have not foreclosed on loans. It seems strange that such a consensus is emerging, as this is the very activity for which banks received so much criticism in previous recessions.

By and large, the limited action of most banks should be no surprise. There are myriad reasons why this is the case — and not just a desire to take a constructive approach. A good few fall under the banner of practicality and logistics, particularly if an organisation is going through wider change or there is direct or indirect government involvement.

Others fall under the categories of accounting and culture. It is no doubt perplexing to those used to trading book accounting and the rigour of daily marking to market of assets, but it is simply that many commercial banks instinctively seek to try to work through problem assets over time — preferably with the original borrowers — rather than crystallising a loss, recovering the capital and putting it to use elsewhere.

Whatever the rights or wrongs, this is unlikely to change, so the trickle of activity is unlikely to become a torrent — especially as balance sheets can only sustain a certain level of write-offs.

But, if most banks have now assessed the extent of the issues and have put structures and resources in place to manage them, what should they do next?

“Whatever the rights or wrongs, the trickle of activity is unlikely to become a torrent”
For organisations that have announced they will reduce their exposure to property, taking no or very limited ongoing action would seem at odds with this objective.

A balance sheet struggling under a weight of a large impaired book will not maximise the opportunity for more profitable new deals available. Worse still would be to fail to put the balance sheet into order for the medium term.

More banks may take more action, especially as there has been a rally in sentiment — if not the economic fundamentals — and there appears to be more liquidity than one dared to dream of earlier this year. Whether this brings a wave of buying opportunities remains to be seen.

Banks will try to offload assets where the prospects of a successful restructuring seem less, rather than more, likely. Whether these types of assets are really the opportunity that most seek is debatable. The less headline-grabbing reduction or non-renewal at maturity of facilities for performing assets are more likely to bring more mainstream product to the market.

Source: Property Week (www.propertyweek.co.uk)