A small upside is emerging to the big losses banks have booked since 2008: They're starting to get some of that money back.
So-called recoveries — or money bankers believed borrowers weren't going to return — rose late last year at many of the country's large and midsize banks as they received stronger payments on troubled business mortgages and sold problem assets at a gain.
The lost money found at U.S. Bancorp, Wells Fargo & Co., KeyCorp and Comerica Inc. wasn't a huge amount — about $900 million at the four companies, which collectively have assets of more than $1.7 trillion. But it helped offset the pain from new losses, experts said, and could be a new crutch the industry could lean on as it slowly works its way through a still-massive backlog of problem consumer and commercial loans.
Recoveries are "very common to see in the industry, particularly at this stage in the cycle, where you have a couple years of heavier chargeoffs," said Stephen D. Steinour, chairman and chief executive of Huntington Bancshares Inc. in Columbus, Ohio, which booked $129 million of recoveries in 2010, about 51% more than in 2009.
He said recoveries — which can only come from interest payments or asset sales gains — tend to be about 5%-15% of chargeoffs in normal times. At Huntington, they were about 16% of chargeoffs in the fourth quarter.
"At the end of a cycle like this it could be above that," Steinour said. Most of them came from commercial real estate borrowers it had written off throughout its Midwest territory, he said.
Banks make certain assumptions when charging off loans, said Terry McEvoy, managing director and banking analyst with Oppenheimer & Co. Recoveries are a rare case of being rewarded for making wrong ones, he said.
"That is admittedly a positive," he said.
Recoveries come from developments that banks couldn't have predicted when they classified a debt as unrecoverable, McEvoy said — a troubled business owner finding outside funding to pay back the bank, or a private investor swooping in to buy a piece of a stalled property development.
"I think it's kind of the same thing as releasing reserves," McEvoy said. "It does generate a capital event; it does move money back into capital."
Will banks earn back a lot of the $430 billion in loans regulators say the industry has charged off during the last three years? Probably not, experts say.
What is happening is that the depth of those losses — many of them based on judgment calls — are simply easing new losses banks are booking as the economy recovers.
Banks booking a lot more of them say they are a sign of aggressive credit risk management.
"The recoveries "reflect the fact that we have remained prudent in the marks that we have taken through the cycle," Comerica's chief credit officer, John Killian, told analysts last month.
Comerica's net chargeoffs fell 14%, or $19 million, in the fourth quarter, with a good chunk of that decline from $17 million in business-property mortgage and commercial loan recoveries. Take out all of its loan recoveries, which doubled from the previous quarter, and the Dallas company's chargeoffs would have been down just 3.4%.
U.S. Bancorp saw a big bounce in recoveries, too. They were up 32%, to $98 million, from the third quarter — the highest level in at least a year. Chargeoffs before recoveries declined 3%. Net chargeoffs, or chargeoffs minus recoveries, declined 5.8%.
The net chargeoff ratio of the median bank in Barclays Capital's 27-bank coverage group fell to 1.97% from 2.11%, according to a research note Barclays released this week. It was projecting the ratio — which represents chargeoffs as a percent of total loans — would only fall to about 1.99%.
"This came against the backdrop of what is typically a seasonally difficult quarter," Barclays analysts wrote, noting that chargeoffs have increased in "24 out of the past 25" fourth quarters.
And this is all possible because the complex arithmetic of banks' loan-loss allowances.
The allowance is essentially the sum of all the money a bank sets aside to cover losses on loans it thinks might happen in the future minus actual losses. Recoveries are de facto provisions, or the amount of specific loss coverage a bank adds to the allowance every quarter. Recoveries are treated as an addition to the allowance, too. They do not go directly to net income. Accounting rules dictate that a recovery either has to come from collecting cash from a borrower or from the sale of an asset that ended up being sold for more money than a bank had carried it on the books. They can't be created by writing up the value of a loan a bank had written down.