Under-reported – and non-performing – assets at US banks

Posted by Tracy Alloway on Jun 17 13:28. 1 comment | Share

A sudden regulatory and accounting push on banks’ “extend and pretend” practices means we’re about to get a peek at one form of renegotiated loans come the third-quarter — so-called Troubled Debt Restructurings. More…

A sudden regulatory and accounting push on banks’ “extend and pretend” practices means we’re about to get a peek at one form of renegotiated loans come the third-quarter — so-called Troubled Debt Restructurings.

The Securities and Exchange Commission has been on the case of restructured bank loans since March this year, when it fired off a letter asking financials to clarify their loan modifications. As a reminder, loan mods can change the terms of a loan for a borrower, giving them another chance to make good on the debt, but modified loans do have an unnerving tendency to redefault. In April, the US accounting board announced they’d be firming up rules on how banks account for and report Troubled Debt Restructurings (TDRs). The new guidance is expected to increase the amount of loans reported as TDRs on banks’ balance sheets once it comes into effect this Autumn.

The basic idea to remember, though, is that banks have been very busy renegotiating their loans recently, which means reported figures may be skewed or even hidden. It’s basic extend and pretend stuff. You modify the loan — allowing you to classify it as performing, even if it has a relatively higher chance of going into default.

Which is why we like the below table from Barclays Capital’s Jason Goldberg:

In Figure 21, nonaccrual loans are loans where interest is no longer accruing, while renegotiated loans have had their original terms altered though they are not nonaccrual or 90-plus days past due. Nonperforming loans sums the two. Add in other real estate and any other assets acquired through foreclosure or repossession and one gets to a definition of nonperforming assets. Generally speaking, however, this figure is higher than what many companies report. For C, JPM, HBAN, TCB, FITB, STI, and USB the dollar difference appears to be 50%-plus. In terms of basis points in the NPA/asset ratio, SNV, TCB, FITB, STI, C, RF, and HBAN appear to have the largest differences, all above 115bps. An exclusion of performing renegotiated loans appears to be driving the difference.

Heady stuff, eh?

Related links:
The extend and pretend exposé – coming to a bank near you – FT Alphaville
Regulators looking at banks’ coverage ratios – FT Alphaville

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