RBS Citizens is attempting to dramatically shrink its book of commercial real estate business by virtually halting all new lending and extracting sometimes harsh concessions from current borrowers, according to several industry sources.
“They have not been a factor in the marketplace, and are not currently a factor,” one industry source told Banker & Tradesman. This source, like others who spoke for this story, asked not to be identified because of ongoing relationships with the bank.
A second industry source said the bank is under pressure from its British parent to close out roughly 2,000 of its existing commercial real estate accounts. RBS Citizens’ parent, the Royal Bank of Scotland, is 84 percent owned by the British government.
“They’re on a tear closing out commercial real estate loans,” said one local attorney, who described his clients’ dealings with the bank as “very, very difficult – they’ve been brutal on borrowers.”
RBS Citizens is a regional banking giant based in Rhode Island, with a footprint stretching from Maine to Illinois. In 2009, RBS Citizens ranked sixth in commercial mortgage market share in Massachusetts, according to data from The Warren Group, publisher of Banker & Tradesman. The bank was the fifth most active commercial lender in the state in 2008, and ranked fourth in 2007. The bank has 254 branches in Massachusetts.
“We are very much committed to our commercial real estate business,” RBS Citizens spokesman Michael Jones told Banker & Tradesman. Jones said the bank has “made the decision to change our approach to commercial real estate, from a transaction model to a multi-product, relationship-based approach.”
Value Over Performance
A number of industry sources Banker & Tradesman spoke to said RBS Citizens has all but stopped writing new commercial real estate loans. That’s not necessarily unique, as a number of lenders have recently retrenched and concentrated their efforts on managing their existing customer base.
However, the bank is also said to be beating up on existing customers, demanding significant capital infusions and marking down property values much more aggressively than its peers.
The commercial real estate downturn has played havoc with properties’ values. Falling values have made mortgage refinancing a difficult and painful process.
In response, federal regulators encouraged banks to extend loans that are maturing but still able to make monthly debt service payments, regardless of falling values. An October policy paper from the Federal Reserve, FDIC and Office of the Comptroller of the Currency said regulators would not mark down performing commercial mortgages “solely because the value of the underlying collateral declined.”
According to several industry sources, RBS Citizens is focusing hard on values, not performance. That stance has presented commercial real estate investors with two unappetizing options: Find a pile of new cash, or hand back the keys.
The anonymous real estate attorney relayed the tale of one client with an office property who put in additional equity, but “not as much as Citizens wanted. Citizens pulled the plug and put them on the precipice of bankruptcy. It was performing fine.”
For its part, Jones said Citizens “considers a number of variables, including relationships,” in workout scenarios.
“[Citizens is] caught in a political hornet’s nest,” the first industry source said. “There’s static around credit, but there is no real credit flowing. They need to shrink the bank, the British government doesn’t want their taxpayer dollars to go to keeping credit flowing in another country, and Washington is leaning on any bank, saying, ‘you have to extend credit.’”
Cutting Bait
At $11.2 billion, Citizens’ commercial real estate and development loans represent a fraction of its total $36.8 billion residential loan book. Problems on the residential side have helped drive record loan loss provisions.
But even as residential markets have begun to stabilize, RBS Citizens’ losses have accelerated.
The bank lost $99 million in the first quarter of 2009, $264 million in the second quarter, $429 million in the third quarter and $600 million in the fourth quarter, ending the year $1.4 billion in the red. By comparison, RBS Citizens lost $761 million in the fourth quarter of 2008, but still managed to post a $209 million profit for that full year.
The growth of the bank’s residential real estate charge-offs slowed significantly in 2009. Residential charge-offs grew 86 percent from 2008’s levels, after a 491 percent spike from 2007 to 2008.
Commercial real estate’s woes have lagged residential real estate, though. Plummeting rental rates and rising vacancies have weakened property performance. Scarce credit and ballooning capitalization rates, the rate at which a property is valued relative to its income, have hammered values.
Faced with a souring market, it appears Citizens is trying to dump its commercial book before things get worse.
Commercial real estate and development loan charge-offs at RBS Citizens grew at a 175 percent clip in 2008 and again in 2009, according to filings. Nonperforming commercial real estate and development loans soared 170 percent from 2007 to 2009. And the segment may not hit bottom for another year.
As of Dec. 31, RBS Citizens’ total balance of REO and nonperforming commercial real estate and construction and development loans stood at $671.6 million, or 6 percent of the bank’s $11.2 billion commercial and development business. By contrast, over the same period the balance of nonperforming commercial mortgage-backed securities in the U.S. stood at 5.2 percent, according to the CMBS data firm Realpoint. That figure grew to 5.8 percent in January.
