Banks ready to negotiate on breached loan cases

Jun 25 2009 by Alun Thorne, Birmingham Post

Banks are less likely to call in loans that have simply breached their loan to value ratios and are instead focusing on restructuring, continued investment or equity injection as possible solutions, according to new research.

The survey of banks, including RBS, Alliance & Leicester, Allied Irish Bank, Bank of Scotland, Hypo Real Estate and Northern Rock, found three-quarters of banks look at LTV breaches on a case-by-case basis, with almost 50 per cent saying that an LTV breach was not reason enough to call in a loan with falls in LTV accounting for less than 15 per cent of loans being called in.

A further 17 per cent said that they would waive the breach or take no action, with 15 per cent re-negotiating or restructuring the loan terms.

David Allen, director of Birmingham investment at BNP Paribas Real Estate, said: “It is clear that loans in breach of LTV are being judged on a case-by-case basis.

“Firstly, the banks consult the client and determine if it is appropriate that the loan conditions be rewritten, bearing in mind the stability of the client’s cash-flow.

“If the loan cannot be restructured, it may need some sort of cash injection by the client.

‘‘If none of the above are options, the bank has to consider its own interests, but it is only then that it might turn to a receiver.

“It seems banks are currently looking for any way possible other than employing the latter, but this can all change quickly, as quickly as the market can itself change.”

On the subject of lending, the banks admitted there had been no change to risk assessment procedures since the downturn began as these were well-established and they were confident in their accuracy and effectiveness.

However, many of those surveyed did acknowledge that this may be down to the fact that there had been little or no new lending thus procedures were not being scrutinised.

On the recapitalisation of the banks, a third of those interviewed felt that government intervention was a positive action with some seeing it as necessary to avoid collapse. However, more than 80 per cent said that this had no effect on their approach to breached loans.

There were mixed views about when to expect the property market to come back with most looking for recovery in the next two years, with the most pessimistic views suggesting a wait until 2013.

Mr Allen added: “When recovery does come, be it next year, 2011 or as one or two bankers interviewed said, 2013, it seems to be a common consensus that despite no long-term problems as such, banks will be much more conservative and prudent when it comes to lending, with a more transparent and a more explicit account of risk undertaken.”

While a fifth of those interviewed thought that there would be no long-term problems or issues that would outlive the recovery, just under 50 per cent thought that new lending would be more conservative, transparent and regulated, with a need to find new ways of funding.

“Even though people are talking about the economy getting better, the banks are still expecting further capital declines and tenant defaults,” concluded Mr Allen.

“As the economy turns, failure of occupiers and ongoing pressure on rents will put additional pressure on borrowers.

“Market sentiment also leads us to believe that some lenders will start getting tougher with borrowers, particularly as the so-called ‘recovery’ of the market appears to be getting closer.

“Some believe that banks are increasingly likely to call in a loan and get the benefit of the recovery in values,” Mr Allen said.