Realpoint, the ratings firm that specializes in bonds backed by commercial real estate properties, is out with its July delinquency report on loans in CMBS deals and it has lots of great data tidbits on the building pressure on distressed loans.
I just came across this research from the Cleveland Fed that has some scary numbers and charts on commercial real estate. They underscore why the Fed and the FDIC are so worried, particularly about construction and development loans, which are seeing the most stress.
It’s no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.
The 17% return on the Credit Suisse toxic bonus pool so far this year, as reported by the Wall Street Journal, surely soothed hard feelings among bankers who were outraged in December when the bank told 2,000 of them that bonuses would be linked to the performance of risky leveraged loans and commercial mortgage-backed securities dumped into a pool called the partner asset facility.
from Margaret Doyle:
Lloyds Banking Group's outgoing chairman, Victor Blank, foretold "exciting prospects [and] long-term success" as the bank wrote off 13.4 billion pounds in bad debts, contributing to an overall 4 billion pound loss. The group's assertion that its loan impairments have peaked -- well ahead of when historical precedent suggests -- may also prove a hostage to fortune.
Blank's remarks and chief executive Eric Daniels' thanks to him for his "significant contribution" had an air of surrealism about them. Blank, after all, cooked up the hasty takeover of HBOS that scuppered the formerly cautious Lloyds last autumn, forcing it into government arms. Daniels did nothing to stop him.
Blank is bowing out after losing the confidence of UK Financial Investments, the body that looks after the government's 43 percent stake in the bank. However, UKFI's boss, John Kingman. still defends Daniels, whose old-style banking skills are seen as key to digging Lloyds out of this mess.
The extent of the damage of the HBOS deal is evident from the numbers. No less than 80 percent of the impairments come from its book, which was laden with overvalued real estate, both commercial and residential. Indeed, the cost of bad HBOS loans in the first six months of the year exceeds the amount it spent buying the bank.
In Lloyds' defence, it is dealing aggressively with Blank's unfortunate legacy. It is working through the loan book and identifying the real dross that will go into the Government Asset Protection Scheme (GAPS). Three quarters of the assets affected by the impairment charge are ear-marked for the GAPS.
Moreover, all of the group's new lending (which is significant -- gross mortgage lending, for example, is 18 billion pounds, maintaining its market share at 27 percent), is now done under Lloyds stricter criteria. The group is winding down the "specialist", e.g. self certified, and buy-to-let mortgage categories that proved so tempting to amateur property barons.
Lloyds is also crunching through the integration at top speed. It has always been known for being tight on costs. Indeed, it is a bitter joke in the industry that it drip-feeds job losses -- rather than declaring its target for cuts -- in an effort to avoid political fall-out. Staff numbers fell by 2,619 in the first half, to 118,207. More are surely to come with the group targeting an annual improvement of a full 2 percentage points in its cost income ratio for the next few years.
On the funding side, Lloyds is increasing the maturity of its funding -- despite the higher costs -- though are still concerns the enlarged bank remains overly dependent on wholesale funding which is currently being supplied by central banks and
So far, each of these initiatives has been dwarfed by the sheer scale of HBOS losses. Normally banking losses peak a year or so after the trough of the recession, which suggests any turning point is at least twelve months away.
Lloyds reckons that the property focus of the HBOS books means that losses have peaked much earlier than they would otherwise have done. The GAPS should also help shield Lloyds from mounting losses.
However, general corporate defaults are likely to rise, as are nemployment-related defaults on unsecured debt. If Lloyds' prediction proves correct, it will have taken a step towards rebuilding its battered credibility. Who knows? Daniels may be able to keep his job after all.