Banks' book values climb as bond portfolio market prices hold steady

Interest rates ended the second quarter close to where they started, keeping a measure of unrealized losses on banks' bond holdings in check as the book value of their shares continued to rise.

Accumulated other comprehensive income (AOCI), which includes the impact of rates on the value of banks' available-for-sale (AFS) securities, improved $5.11 billion sequentially across the 15 largest US banks to negative $138.75 billion, according to data from S&P Global Market Intelligence. Tangible common equity (TCE) per share increased sequentially and year over year at all 15 banks, with a median sequential increase of 2.6% and a median year-over-year increase of 11.0%.

AOCI has been a large drag on banks' TCE since the Federal Reserve started raising rates in early 2022, as the market value of bonds moves inversely with rates. Banks responded with changes to their portfolios, building capital amid proposals to toughen regulatory requirements and anticipated rate cuts that would accelerate the process by which maturities cut into the AOCI deficit.

Attention is turning to what the banks will do with capital surpluses, though "we remain in a bit of an air pocket with regard to capital management" because the outcome of the proposed rules is not yet known, Piper Sandler analyst R. Scott Siefers said in a July 26 note on large regional banks. "The group is now sitting on an increasing horde of capital that can be returned over time."

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Portfolio moves

While banks' combined holdings of securities has been essentially flat for several quarters, individual portfolios continue to be reshaped as some absorb unrealized losses to jettison low-yielding bonds, and others add bonds at current rates and position for Fed cuts.

Synovus Financial Corp.'s AFS securities declined $2.65 billion sequentially during the second quarter to $7.04 billion as it moved underwater bonds it is unlikely to sell into the held-to-maturity category, sold $1.6 billion of AFS bonds yielding 1.4% at a $257 million loss, and bought $1.5 billion of AFS bonds yielding 5.0%.

Webster Financial Corp.'s AFS securities declined $792.3 million sequentially to $7.81 billion, though its securities increased overall. The bank sold about $1 billion of low-yielding securities during the second quarter and reinvested the proceeds.

The Bancorp Inc. bought about $900 million of fixed-rate bonds yielding 5.11% during the second quarter, more than doubling its AFS portfolio, which it said would protect net interest income against rate cuts.

AFS securities increased at JPMorgan Chase & Co. by $30.10 billion sequentially to $266.25 billion. CFO Jeremy Barnum said the bank has added duration over the last two quarters, though he observed that because the yield curve is inverted — long-term rates are lower than short-term rates — extending duration does not lock in yields at the current Fed target of nearly 5.5%. "The forwards are not sort of that compelling given our views about some sort of structural upward pressures on inflation and so on," Barnum added.

Barnum also said the bank aims at balanced positioning across different scenarios and across different measures including net interest income and capital, so "I don't think that kind of a big change in duration posture is a thing that's front of line for us."

Biggest banks

Among the 15 biggest banks, Truist Financial Corp. posted the largest quarterly improvement in AOCI and the second-largest percentage increase in TCE, reflecting the sale of its insurance brokerage and a simultaneous securities repositioning.

Its common equity Tier 1 (CET1) ratio reached 11.6% at June 30, compared with a required minimum of 7.3% that will be effective Oct. 1, and it estimated that its CET1 ratio would be 9.1% with the Basel III endgame fully implemented as currently proposed. Truist is resuming share repurchases but said it would keep its capital levels about steady in the near term as it looks for a rebound in credit demand.

Firmed expectations for rate cuts appear poised to boost capital levels further. After average rates across 2-year to 7-year Treasurys moved up 12 basis points from March 31 to June 30, they declined 30 basis points through July 29.