How to Know if a Bank Can Sell

If you’ve been in the distressed real estate space for any length of time you probably already know 2 things (at least):

1. Doing real deals requires relationships
2. Building those relationships can take time

Yeah, yeah, so what?

So if we know these things to be true then how do we make sure that we’re spending our time (our most valuable asset) wisely when we’re building new asset manager, workout officer, etc. relationships?

Well, clearly we need to know that our prospect has what we’re looking for (non performing loans, REO, whatever). But equally as important (I submit) is whether or not that prospect can sell. So the question is…

Is the bank able to sell at today’s market (or below) price?

You could dismiss this and say ‘well of course they can they’re the bank, what else are they going to do?’. But you’d be wrong…

A bank’s balance sheet determine’s whether or not it can sell. Banks have these troubled assets (non performing loans, REO) on their books at the last appraised value (more or less).

I know that if you’re in this business today, then you know that appraisals are plagued by the dearth of comps and values tend to be inflated. Which is good if you run a bank that’s on the ropes. It’s not malicious or intentional but it happens a lot and it’s true.

So if you’re a bank, you have this stuff on your books, and you need to get rid of it, just sell it right? Wrong. If you haven’t written it down enough and you’re not otherwise adequately capitalized to sustain the balance sheet blow, you wait. Not waiting, in fact, could be the death blow.

A key indicator that determines wether or not a bank can sell: ‘Capital Adequacy Ratios’ – CAR

Capital adequacy ratios sounds complicated, and it is, but it’s basically buckets of a bank’s capital divided by the bank’s ‘Risk Weighted Assets’… but who cares? This is all you need to know, Tier 1 CAR needs to be 4% or above and Total CAR needs to be 8% or above.

Banks that are skimming along below these mandated levels are at risk of failure, our research bares this out. What you might find is that when a bank’s CAR is at or below these levels well intentioned special assets or workout people will just be wasting your time. It’s not that they don’t want to sell, it’s that they cannot.

So in the mean time time while they’re waiting for the other shoe to drop or else for the bank to get acquired or to have some kind of depository windfall you can bet they’re talking to investors and consultants and brokers and they’re going to look like they’re working hard to move that stuff along, but it just ‘ain’t gonna happen’.

Capital Adequacy Ratios for every one of the 7000 banks we’re tracking can be found under the ‘Regulatory Capital Ratios’ column of every bank record. ‘Tier 1 Risk Based’ should not be lower than 4% and ‘Total Risk Based’ should not be below 8%.