ZION - Q1 Update For List Of Banks That Still Have Massive Unrealized Securities Losses
2023-05-08 10:21:22 ET
Summary
- Many banks continued to have massive unrealized losses in their securities portfolio as of March 31.
- The 10-Q reports that were filed last week by banks allowed investors to get details on the unrealized losses that were not contained in 1Q earnings press reports.
- Losses will remain high as long as interest rates remain elevated.
- These losses have created a confidence issue for some banks.
At the end of the first quarter most banks continue to show massive unrealized losses in their securities portfolio. For many banks, losses were actually somewhat lower than at the end of the 2022 because long-term interest rates dropped a little on the long end of the yield curve. The reality is that these losses are not going away any time soon with interest rates remaining very high relative to early 2021. Most banks filed their quarterly 10-Q reports last week that allows for more detailed analysis than their 1Q earnings news releases filed in mid-April. This is a 1Q update to my March 12 article on the unrealized losses by a list of banks.
It is also interesting to note that based on those banks who have already filed their 10- Q reports, there was no panic selling of securities during the quarter to raise cash. Actually, there was very modest buying/selling of securities in general - nothing really unusual.
Interest Rates Changes
As most readers already know debt security prices are more sensitive to changes in interest rates the longer the maturity of that security. In addition, the lower the coupon the more sensitive the security is to interest rate changes.
U.S. Treasury Yields
| 12/31/2021 |
| 12/30/2022 |
| 3/2/2023 |
| 3/31/2023 |
| 5/5/2023 |
| 3 month |
| 0.06 |
| 4.42 |
| 4.91 |
| 4.85 |
| 5.26 |
| 6 month |
| 0.19 |
| 4.76 |
| 5.18 |
| 4.94 |
| 5.13 |
| 1 year |
| 0.39 |
| 4.73 |
| 5.04 |
| 4.64 |
| 4.73 |
| 2 year |
| 0.73 |
| 4.41 |
| 4.89 |
| 4.06 |
| 3.92 |
| 5 year |
| 1.26 |
| 3.99 |
| 4.32 |
| 3.61 |
| 3.41 |
| 10 year |
| 1.52 |
| 3.88 |
| 4.08 |
| 3.48 |
| 3.44 |
| 30 year |
| 1.91 |
| 3.97 |
| 4.03 |
| 3.67 |
| 3.76 |
Source: Resource Center | U.S. Department of the Treasury
I included the interest rates for 3/2/2023 because that was when many investors got a wake-up call regarding potential large unrealized losses by banks because the 30-year treasury bond traded above 4.0%. It was also just a few days after the filings by many banks of their 10-K reports that showed massive unrealized losses, which are the numbers I used in my March 12 article. This is when the banking crisis, in my opinion, started. Many traders started shorting bank stocks around that date.
The short end of the yield curve has moved higher since March 31, which is the date the numbers below are based on, but the middle of the yield curve has moved lower since then, so it is impossible to generalize if banks have smaller or larger unrealized losses in April/early May without looking at the details of a specific bank's holdings.
Metrics Covered in This Report
Banks usually report securities in two different accounts. First is Available-For -Sale - AFS - securities, which are securities that might be sold before maturity. These are often considered trading account securities. Their fair value is reported on the balance sheet and the unrealized gains/losses are reported via 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. Because some banks had lower unrealized AFS losses at the end of 1Q compared to the end of last year, their shareholder equity number actually increased to reflect this improvement. The change, however, was not reflected on the 1Q income statement.
The second account is Held-To-Maturity -HTM - securities, which are securities that are expected to be held to maturity. Not all banks use HTM reporting and only use AFS accounts. HTM securities are reported on the balance sheet at cost - not at fair value. Any actual gain/loss on either their sale or any gain/loss if they are held to maturity is also reported on the income statement.
I don't like HTM reporting because it can be used to "hide" unrealized losses and requires an investor to look at the footnotes in a bank's filed reports to get the actual unrealized losses/gains. Truist Financial ( TFC ), for example, moved over $59 billion in long-term MBS to their HTM account from their AFS account in 1Q 2022 just when interest rates started to soar, which allowed them to avoid reporting unrealized losses via AOCI in their shareholder equity section of their balance sheet. They report the HTM MBS at cost on the balance sheet.
I added both AFS and HTM unrealized losses to get a total amount and then determine how much per share. Some assert that this is adding "apples and oranges", but if there is ever a liquidity crunch at a specific bank, the trading desk may have to sell much of the entire "fruit salad" to raise cash quickly. Yes, these numbers in this article ignore various hedges, but again hedges often can't be liquidated fast enough during a liquidity problem. Hedges are structured to be used on a continuous basis over time - they are not really very useful when there is a run on the bank. Investors should, however, look at hedges at specific banks before trading their securities. They also need to remember that some currency hedges are effectively partially interest rate sensitive hedges.
I compared the total unrealized losses per share to tangible book value per share. Since my prior article was aimed mostly at the general public interested to see losses at specific banks, I used a very simple metric of share price for a comparison metric. I have included a graph of share prices to allow readers to again compare the unrealized losses to share prices. There are a few problems using tangible book value per share. For example, the figure may include other entities a bank holding may own besides just their banking subsidiary. In addition, some banks may have assets that are worth significantly more than the accounting value reported on the balance sheet. Again, these are just general numbers and investors need to do additional research.
The first group of banks include those in my prior article and the second group includes those I posted in the comment section of the prior article after relatives/friends closed their short sales of that specific bank. (They were absolutely against me writing about banks if they had very significant short sale positions for that specific bank.) A few banks still have not filed their latest 10-K report, including some very distressed banks, or were taken over. When they file, I will post the numbers in the comment section below. If a reader wants the numbers on a specific bank not covered in this article, post the request in the comment section below and I will try to reply.
First Quarter March 31 Updated Unrealized Losses
Citigroup ( C )
March 31, 2023
Loss per share $14.00; 16.7% of $84.21 tangible book value
AFS $245,340 million cost - $240,487 million fair value = $4,853 million loss
HTM $264,342 million cost - $242,851 million fair value = $22,491 million loss
Total unrealized loss $27,344 million
December 31, 2022
Loss per share $16.02
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 unrealized loss $31,144 million
JPMorgan Chase ( JPM )
March 31, 2023
Loss per share $13.09; 17.1% of $76.69 tangible book value
AFS $204,671 million cost - $197,248 million fair value = $7,423 million loss
HTM $412,827 million cost - $381,990 million fair value = $30,837 million loss
Total unrealized loss $38,260 million
December 31,2022
Loss per share $16.00
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 unrealized loss $47,084 million
Wells Fargo ( WFC )
March 31, 2023
Loss per share $11.97; 33.4% of $35.87 tangible book value
AFS $151,861 million cost - $144,398 million fair value = $7,463 million loss
HTM $277,147 million cost - $240,688 million fair value = $37,459 million loss
Total unrealized loss $44,922 million
December 31, 2022
Loss per share $13.09
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 unrealized loss $49,669 million
Bank of America ( BAC )
March 31, 2023
Loss per share $12.92; 56.7% of $22.78 tangible book value
AFS $166,349 million cost - $162,410 million fair value = $3,939 million loss
HTM $624,495 million cost - $525,452 million fair value = $99,043 million loss
Total unrealized loss $102,982 million
December 31, 2022
Loss per share $14.28
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 unrealized loss $114,293 million
KeyCorp ( KEY )
March 31, 2023
Loss per share $8.02; 82.9% of $9.67 tangible book value
AFS $45,552 million cost - $39,498 million fair value = $6,054 million loss
HTM $9,561 million cost - $8,113 million fair value = $1,448 million loss
Total unrealized loss $7,502 million
December 31, 2023
Loss per share $7.55
AFS $45,552 million cost - $39,117 million fair value = $6,435 million loss
HTM $8,710 million cost - $8,113 million fair value = $597 million loss
Total unrealized loss $7,032 million
Zions Bancorporation ( ZION )
March 31, 2023
Loss per share $8.32; 18.7% of $44.57 tangible book value
AFS $13,075 million cost - $11,594 million fair value = $1,481 million loss
HTM $10,961 million cost - $11,210 million fair value = $249 million gain
Total unrealized loss $1,232 million
December 31, 2022
Loss per share $10.15
AFS $13,538 million cost - $11,915 million fair value = $1,623 million loss
HTM $11,126 million cost - $11,239 million = $113 million gain
Total unrealized loss $1,510 million
Truist Financial ( TFC )
March 31, 2023
Loss per share $15.00; 82.3% of $19.45 tangible book value
AFS $82,998 million cost - $71,858 million fair value = $11,140 million loss
HTM $56,932 million cost - $48,097 million fair value = $8,835 million loss
Total unrealized loss $19,975 million
December 31, 2022
Loss per share $16.70
AFS $84,056 million cost - $71,801 million fair value = $12,255 million loss
HTM $57,713 million cost - $47,791 million fair value = $9,922 million loss
Total unrealized loss $22,177 million
Bank of New York Mellon ( BK )
March 31, 2023
Loss per share $12.99; 55.2% of $23.52 of tangible book value
AFS $88,872 million cost - $84,117 million fair value = $4,755 million loss
HTM $54,561 million cost - $49,067 million fair value = $5,494 million loss
Total unrealized loss $10,249 million
December 31, 2022
Loss per share 15.00
AFS $92,484 million cost - $86,622 million fair value = $5,862 million loss
HTM $56,194 million cost - $49,992 million fair value = $6,202 million loss
Total loss $12,064 million
Comerica ( CMA )
March 31, 2023
Loss per share $20.68; 54.9% of $37.68 tangible book value
AFS $21,019 million cost - $18,295 million fair value = $2,724 million loss
HTM None
Total unrealized loss $2,724 million
December 31, 2002
Loss per share $23.08
AFS $22,045 million cost - $19,012 million fair value = $3,033 million loss
HTM None
Total unrealized loss $3,033 million
Capital One Financial Group ( COF )
March 31, 2023
Loss per share $23.21; 25.5% of $90.86 tangible book value
AFS $90,785 million cost - $81,925 million = $8,860 million
HTM None
Total unrealized loss $8,860 million
December 31, 2022
Loss per share $26.58
AFS $87,047 million cost - $76,919 fair value = $10,128 million loss
HTM None
Total unrealized loss $10,128 million
M&T Bank Corp. ( MTB )
March 31, 2023
Loss per share $8.15; 9.2% of $88.81 tangible book value
AFS $11,394 million cost - $11,039 million fair value = $355 million loss
HTM $16,202 million cost - $15,204 million fair value = $998 million loss
Total unrealized loss $1,353 million
December 31, 2022
Loss per share $9.53
AFS $11,193 million cost - $10,749 million fair value = $444 million loss
HTM $13,530 million cost - $12,375 million fair value = $1,155 million
Total unrealized loss $1,599 million
Conclusion
I have not included any banks that I am currently long or short because I feel that a complete analysis on an investment should be included when I report position disclosures. I currently have an effective pair trade of shorting a group of weak regional banks and going long a group of stronger regional banks.
The major banking industry problem of massive unrealized losses in securities is not going away. As long as interest rates remain high, this issue will be on the front burner. Currently there is focus on change in deposits, which will soon be followed by greatly increased level of bad debt charge-offs caused by the recession. The banking crisis is not over.
For further details see:
Q1 Update For List Of Banks That Still Have Massive Unrealized Securities Losses