New source of conflict for banks: the frenzy of closure of branches is creating problems with big customers of private banking, threatening to turn into a new headache for commercial relations of banks.
The origin of the conflict are the sale & lease back agreements, which banks and savings banks signed at the beginning of the crisis, between 2007 and 2008. They sold nearly 4400 branches to funds and big fortunes with the commitment of becoming a tenant and paying a fair annual rent for periods of around ten years. With these agreements, the institution obtained liquidity in a complicated moment in the market; while customers acquired a real estate asset with an assured profitability.
What they were not counting on was the worsening of the crisis which has obliged institutions to close more than 7000 branches out of the 46000 which existed in 2008, and with plans to continue reducing the number. Different studies establish that there is still room for a reduction of 15%-20%.
Up to now most complicated situations have been solved amicably. But there are already cases where banks have threatened to present the case to court.
The worse situation can be found in those branches where the institution is a tenant, without a previous sale agreement. There are already court decisions which allow banks and savings banks to cancel the leases paying one month of rent per pending year.
Things do not look so somber in the sale & lease back agreements. “For the moment banks do not dare go to court on those branches which were sold, as it is clear that the object of the sale was not the property itself but the lease agreement, Jose Carlos Torres explains, director of Zaphir Asset Management, real estate agency for Aguirre Newman.
Nevertheless, Guillermo Santos, strategy director of iCapital, thinks that the conflicts between investors and institutions will increase. Negotiations with these customers are being resolved as follows, Santos explains.
- Profitability: Banks are trying to bargain down the signed agreements. Institutions agreed initially to pay a rent/coupon of between 5% and 10%. This alternative only intends to reduce fixed costs.
- Change of branch: Another possibility would be for the bank to offer a change of branch to the investor. This modification (included in many agreements) may be for worse in many occasions, as the new branch is located in a worse area than the original one.
- In some cases, institutions are offering to continue paying the rent even though they leave the branch or to look for a new tenant (…).These are exceptional solutions which some institutions are turning to so as to maintain a good relation with their VIP customers.
Apart from the closure of branches, “most of the branches sold in 2008 and 2009 have an overvalued price, which was inflated by the banks so as to obtain gains with each sale”, sources from an important family office are pointing out. (…)