Fitch: Troubled Debt Restructurings Expected to Rise on New Accounting Guidance
May 16, 2011 (Business Wire) The amount of loans classified as troubled debt restructurings (TDRs) has grown considerably for U.S. banks over the last two years, with the number expected to increase even further due to recent changes in accounting standards and increased regulatory scrutiny, according to a Fitch Ratings report.
Fitch believes that recent changes in accounting guidance (Accounting Standard Update [ASU] 2011-2, April 2011), enhanced disclosures (ASU 2010-20), and increased regulatory scrutiny are expected to result in even more loans moving into TDR status, in addition to providing greater transparency of loans already considered TDR. Fitch anticipates that these changes will alter the loan type mixture of TDRs when the new guidance comes into effect in the second half of 2011.
The new accounting guidance will also require that institutions report redefault rates on TDRs on a portfolio segment basis, beginning in the third quarter of 2011 (3Q'11). This will be the first time redefault rates on nonresidential loans becomes available on a broad basis. Given the recent and forecasted shifts in TDR types away from residential loans, this information will be invaluable to asset quality analysis, especially as it relates to CRE-heavy loan portfolios.
First-lien residential mortgages continue to dominate the current mixture of TDRs, representing 87% of total outstanding TDRs. These loans have experienced extremely high redefault and growth rates over the last two years. The mixture has changed over the past year with nonresidential mortgage TDRs growing at a significantly faster rate than residential TDRs. Overall, total TDRs amongst U.S. banks grew at a 48% pace in 2010, with nonresidential TDRs growing by 85%.
Fitch does not expect that these trends will materially affect ratings on an industry wide basis and Fitch includes currently reported TDRs, regardless of their performance status, in assessing measures of non-performing assets. However, to the extent that specific issuers experience disproportional growth in TDRs and report unusually high redefault rates, certain issuers' ratings could be negatively affected.
The full report 'Troubled Debt Restructurings: Accounting Standards Update Set to Increase TDR Recognition' is available on the Fitch web site www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2010;
--'Troubled Debt Restructuring - Challenges for Ratio Analysis', April 22, 2010;
--'Purchased Impaired Loans - Challenges for Ratio Analysis', April 22, 2010.
Applicable Criteria and Related Research: Troubled Debt Restructurings (Accounting Standards Update Set to Increase TDR Recognition)
Global Financial Institutions Rating Criteria
Troubled Debt Restructuring (Challenges for Ratio Analysis)
Purchased Impaired Loans (Challenges for Ratio Analysis)