Thursday, March 10, 2005

Reuters Summit-Sovereign CEO: Banks' Real Estate Risk Too High

Thu Mar 10, 2005 05:29 PM ET

By Jonathan Stempel

NEW YORK (Reuters) - Sovereign Bancorp Inc.'s chief executive on Thursday said banks are taking excessive risks in commercial real estate, a market some analysts fear is in a bubble resembling that of the late 1980s.

"The banking industry can be very severely hit because commercial banks and selected thrifts are overly weighted in real estate," Jay Sidhu, the chief executive, said at the Reuters Banking Summit in New York. "We're underweight in real estate, and are very cautious. We would not want to become a company with 75 percent of its assets in real estate."

Sidhu has led Philadelphia-based Sovereign since 1989, building it into the third largest U.S. savings and loan mainly by focusing on middle-income customers with household incomes of around $75,000, and small- and mid-sized businesses. It operates mainly in New England and mid-Atlantic states.

Just 11 percent, or $5.8 billion, of Sovereign's $54.5 billion of assets at year end was in commercial real estate loans. This loan book represented 16 percent of the bank's $36.6 billion loan portfolio.

Sidhu said the last commercial real estate bubble, which began around when he took over Sovereign, taught many lessons that have faded over time.

"There was a lot of discipline after that, and what I'm worried about is that some of the people are forgetting," he said. "(Some current lending) is based upon tomorrow's values being greater than today's, so (therefore) how can you go wrong?"

Indeed, there are some signs the market has already peaked, he said. Boston's commercial vacancy rate, for example, is 20 percent, compared with just 5 percent two years ago, he said.


Sidhu said Sovereign does such "what if" analyzes to assess possible risks to its business.

For example, the company's models assume a possibility, though not a probability, that the U.S. economy might slip into recession this year, sooner than many economists expect.

Terrorism, for example, could have a "major impact," as it did in New York City after the Sept. 11 attacks, he said.

If property values start to collapse, he said, "the fallout would be you'll start to see charge-offs (for banks), you'll start to see nonperforming assets, and you'll see a clampdown by regulators. It's a vicious cycle. That makes banks become tougher, which puts a halt on financing, which creates shortages, which creates the beginnings of the next boom." (News from the Reuters Banking Summit will be delivered throughout the day Thursday and Friday to Reuters terminals and to the Web site,


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