Bank profitability was battered throughout 2008 and 2009 by loan loss reserves. As clients endured difficulty paying their debt obligations, the banks were left to write off many of these loans, and realize the losses in their P&L. During 2010 we have seen a strong turnaround, with loan loss reserves down many large banks posted impressive results during the third quarter. This has prompted the banks to examine their business model, and tailor a change to weather a storm better in the future.
JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo (NYSE: WFC) in particular are taking aggressive actions in this space, seeking to increase financing for hotels as lenders recover more money from loans backed by lodging than from debt secured by other types of commercial real estate. Lenders’ losses on non-performing hotel loans were about 53 percent this year through September, compared with 63 percent for retail property loans, 62 percent for industrial, 61 percent for multifamily and 57 percent for office, according to data from Trepp LLC, a New York-based mortgage-information provider. The figures exclude loans with losses of 2 percent or less. A recovery in the lodging industry helped delinquencies on U.S. commercial mortgage-backed securities drop for the first time in almost three years last month, Fitch Ratings said in a Nov. 5 note. The revival is lifting hotel property values and enticing lenders to rework existing loans and seek out new ones.
Christopher Jordan, head of hospitality banking at San Francisco-based Wells Fargo, commented “Right now is a particularly attractive time to be lending to the hotel sector. We prefer lending at the trough to lending at the top. Now you are at the front end of the upswing.”
Jon Strain, head of capital markets for JPMorgan’s commercial real estate group added, “We are definitely making loans on hotels. Revenue and occupancy trends have been very strong across the U.S. Part of the reason for lower loan losses is that the majority of hotel financing was done with floating rates. With the Fed injecting liquidity into the market, keeping interest rates low, a lot of the hotels are performing despite tremendous stress on them. Their interest debt service is low relative to the office and industrial sector.”
With lending set to rise, this can provide a positive knock-on effect to the support industries as well, and provide important fuel to the economic recovery.
