WFC - A List Of Some Banks And Their Shocking Paper Losses On Debt Securities Holdings

2023-03-12 06:33:24 ET

Summary

• Some banks have paper losses on their debt holdings as high as 67% of their current stock price.
• As interest rates rose sharply the last 15 months because the Fed increased their Fed Funds target, bond prices dropped sharply.
• Most of the information about losses on debt securities held by banks is buried in the footnotes in their SEC filings.
• Often these paper losses by banks are not viewed as major problem until there are major liquidity issues at that bank.
• If interest rates continue to move higher, this problem could get even worse.

Banks' paper losses caused by higher interest on their holdings of debt securities became the focus of attention last week when Silicon Valley Bank - SVB Financial Group (SIVB) - was forced to sell billions of dollars of debt securities at a huge loss to pay depositors their money. Often this paper loss data is ignored by investors and is buried in lengthy SEC files, but it can be a significant loss per share compared to the current stock price. While many factors impact the valuation of a bank stock, many readers were asking me about this information, and I have compiled a list of some banks with their unrealized loss per share compared to their latest stock price.

Paper Losses on Securities

The data comes from the respective bank's latest 10-K that reflect December 31, 2022, numbers. Most banks keep securities in two different accounts. Available for sale - AFS - securities are those securities that might be sold before maturity. The fair value is reported on the balance sheet and the gain/loss is shown as accumulated other comprehensive income -AOCI - in the shareholder equity area of the balance sheet. If an AFS security is sold, then the gain/loss is reported on the income statement. Held-to-maturity -HTM - securities are those securities that are expected to be held to maturity. They are reported on the balance sheet at cost - not at fair value. Any gain/loss on either their sale or any gain/loss if they are held to maturity is also reported on the income statement.

The types of securities held by banks vary significantly. Some hold mostly U.S. treasuries and others have mostly mortgages or MBS. The length of maturities also varies between banks. Many banks hedge their debt securities, but because of the complexities of the hedges for specific banks I have not included the hedge data. Investors should, however, look into the hedges. The hedges could help offset the paper losses on the securities, but many hedges are not very liquid. SVB had significant hedge positions, but it still went under. One of the primary reasons for looking at the paper losses on securities is that in the event the bank needs to raise cash quickly these hedges may not help immediately to offset any losses by selling the securities.

Citigroup ( C ) loss per share ($16.02) 33% of stock price

AFS $256,608 million cost - $249,679 million fair value = $5,929 million loss

HTM $268,863 million cost - $243,648 million fair value = $25,215 million loss

*Total loss $31,144 million

JPMorgan Chase ( JPM ) loss per share ($16.00) 12% of stock price

AFS $216,217 million cost - $205,857 million fair value = $10,360 million loss

HTM $425,372 million cost - $388,648 million fair value = $36,724 million loss

*Total loss $47,084 million

Signature Bank ( SBNY ) loss per share $51.44 73% of stock price

AFS $21,071 million cost - $18,594 million fair value = $2,477 million loss

HTM $7,780 million cost - $7,018 million fair value = $762 million loss

*Total loss $3,239 million

U.S. Bancorp ( USB ) loss per share $12.68 31% of stock price

AFS $81,450 million cost - $72,910 million fair value = $8,540 million loss

HTM $88,740 million cost - $77,874 million fair value = $10,866 million loss

*Total loss $19,406 million

First Republic Bank ( FRC ) loss per share $28.15 34% of stock price

AFS $3,817 million cost - $3,347 million fair value = $470 million loss

HTM $28,359 million cost - $23,587 million fair value = $4,772 million loss

*Total loss $5,242 million

(Special note: $27,403 million of the HTM securities mature after 10 years. Longer the maturity, the more sensitive is the bond price to changes in interest rates. In addition, $16,808 million of that number are tax-exempt municipal bonds that mature after 10 years. Munis are also often much less liquid than UST securities.)

Wells Fargo ( WFC ) loss per share $13.09 32% of stock price

AFS $121,725 million cost - $113,594 million fair value = $8,131 million loss

HTM $297,059 million cost - $255,521 million fair value = $41,538 million loss

*Total loss $49,669 million

Western Alliance Bancorp ( WAL ) loss per share $9.61 19% of stock price

AFS $7,973 million cost - $7,092 million fair value = $881 million loss

HTM $1,284 million cost - $1,112 million fair value =$172 million loss

*Total loss $1,053 million

Bank of America ( BAC ) loss per share $14.28 47% of stock price

AFS $225,485 million cost - $220,788 million fair value = $5,697 million loss

HTM $632,863 million cost - $524,267 million fair value = $108,596 million loss

*Total Loss $114,293 million

PacWest Bancorp ( PACW ) loss per share $8.25 67% of stock pric e

AFS $5,655 million cost - $4,843 million fair value = $812 million loss

HTM $2,271 million cost - $2,110 million fair value = $161 million loss

*Total loss $973 million

Compared to SVB

Comparing these banks to SVB it is little shocking. About a week ago SVB was trading at about $283, but their loss per share on the combined AFS and HTM securities was $29.89 or "only" 10.6% of the stock price. (AFS cost was $28,602 million with a $26,068 million fair value. HTM cost was $91,327 million with a fair value of $76,169 million. The total loss was $17,692 million.) Once the run on the bank started and the stock price fell, the loss as a percentage of the stock price soared, but the percentage earlier this month seemed manageable. It swung from a modest issue to become a huge issue very quickly.

Interest Rates

Remember the longer the maturity and the lower the coupon, the more sensitive the note/bond price is to changes in interest rates. Interest rates moved higher from the end of 2022, which means fair values moved lower for notes/bonds, until the run on SVB started. At the end of last week there was flight to quality and traders bought UST securities. It is unclear at this point what the Fed will do.

Yields - U.S. Treasuries

Conclusion

Just looking at the paper losses on a bank's debt securities holdings may not be indicative of the actual value of the stock, but it could be a critical factor for some banks, especially if interest rates rise for the rest of the year. There are many other factors that need to be looked at such as the types of debt securities held. UST securities are much more liquid than munis, for example. Hedges, in theory, should offer some protection, but the details of current hedges are usually not given - only some general hedging information is reported.

SVB did not have a very large paper loss on their debt securities relative to their stock price until after the run on the bank started and they also had hedges. Banks chasing higher yields in the past by going further out on the yield curve may come back to haunt some banks.

I covered most of my bank short sales on Friday, and I am just having a neutral/hold recommendation on bank stocks until it becomes clearer what the Federal Reserve is going to do to reduce the current banking crisis.

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