U.S. regulators are looking hard at banks' expected future tax benefits and the result for some financial institutions could be more writedowns.
Any charges are much more likely to hurt regional and community banks, than the largest U.S. lenders, who have more ways to preserve the benefits, known as deferred tax assets, or DTAs.
The most common reason for a bank to write down these assets is an expected lack of taxable income in the future. As income becomes less likely, regulators including the Federal Deposit Insurance Corp are pressing banks to write them down, experts told Reuters.
Regulatory pressure often means that, at the margin, accountants are inclined to be much more conservative when evaluating these assets.
As long as the FDIC is looking at this, writedowns will be much more widespread, said Jim Goeller, a partner at tax firm Perry-Smith in San Francisco, which audits over 60 banks in California. An FDIC spokesman said the agency looks at all assets on the balance sheets and expects banks to follow accounting rules.
Publicly traded banks have about $134 billion of deferred tax assets on their books, according to SNL Financial. In that sense, the problem is small compared with the $1.7 billion of commercial real estate on companies books, for example.
But for some banks, valuation adjustments can be serious. Consider The South Financial Group Inc
The writedown, known as a valuation allowance, had little impact on its regulatory capital levels. But it did influence its tangible common equity, a measure of capital increasingly important to stock investors and debt rating agencies.
The Greenville, South Carolina-based bank said in a filing this week that it is looking to boost its common equity, potentially through issuing shares.
Issuing shares now is difficult for banks. Starkeville, Mississippi-based Cadence Financial Corp
As of September 30 of this year it had not been forced to write down any of the asset. Chief Financial Officer Richard Haston says the bank looks at its DTA every quarter. It is unclear whether an adjustment will be necessary in the fourth quarter.
It would probably be very difficult for a bank our size to raise capital now, Haston said.
As of September 30, the bank's deferred tax asset was $30.6 million, or about 25 percent of Cadence Financial's net worth as measured by its book equity.
Lawmakers gave some relief to banks last week -- a new law signed last Friday will allow businesses to count accumulated losses against five years of income, compared with prior limits of two years. But those carrybacks apply only to banks that did not sell equity or warrants to the government under the Troubled Asset Relief Program.
Larger banks have more ways to ensure they realize the full benefit of their deferred tax assets, including selling securities or real estate whose value on the bank's books is far below their current market value.
But any writedown would be painful for a bank that lost more than $37.5 billion between the fourth quarter of 2007 and the end of 2008, and is still struggling to eke out profit from its operations.
Concerns about tax assets in general could be making it harder for banks to raise capital, investors said.
Deferred tax assets are generally a very legitimate concern now, said Joe Plevelich, equity research analyst at Schneider Capital Management in Wayne, Pennsylvania.
(Reporting by Dan Wilchins; editing by Andre Grenon)