Year 2023, a priori the banks were going to enjoy a golden age thanks to the frenetic rise in interest rates. However, something that few anticipated unleashed a real earthquake. Silicon Valley Bank announced that its accounts were burdened with unrealized losses faced with a collapse of the bonds in which they had deposited all their financial stability. With little room to breathe, the firm recognizes that it has liquidity problems and panic is taking over its clients. Now the bank, with the need to return deposits, sees unrealized losses become real and the result was its end.
Silicon Valley Bank was not the only one that had bet too much on bonds and, consequently, its fall was only the prologue of a financial tidal wave among the US regional banks that saw their stability and, consequently, that of the entire system compromised. banking of the country. Such was the magnitude of the problem that to calm the situation the Fed needed to make the largest injection of liquidity in history, with 165,000 million dollars to guarantee the future of these banks and, with the insured deposits, so that the sector could be reconfigured in the face of the bonus hit. However, one year Then the regional banks have sold debt again at a loss…with its prices still very low (ten-year US debt offers a yield of 4.2%). Although now it is no longer about the announcement of his fall, but rather the sacrifice necessary for his definitive salvation.
The big difference is that now These banks are not selling the securities of debt to pay deposit outflows, but they are preparing for the future by building a real wall of liquidity with which to anticipate a future of lower rates, meet the Fed’s requirements and even have something more in their saddles to assume the great battle that looms over the sector in the immediate future, the office crisis.
This is a trend that has accelerated since this summer, but It is present throughout 2024. The clearest example is that of PNC Corporation. The Charlotte bank and one of the largest US lenders announced in August losses of $500 million from its bond operations. It was not the only example, Key Corp announced in September that it was selling nearly $7 billion in “low-yield investments” mostly made up of bonds. This operation has caused losses close to 700 million dollars.
Another example has been Truistwhich suffered an after-tax loss of $5.1 billion (in its quarterly results). Regarding the reason for the falls, they argued that one of them was that it had sold low-yield bonds. Regions Yes, he was clear in his announcement during the summer, alleging that he was selling 1,000 million in bonds, recording losses of 50 million dollars. Others like Webster also made the same announcement and, although they did not announce when they received bonus sales (since they were sold little by little and did not make a big announcement), they did recognize that they scored a hit of 38.7 million dollars for assume unrealized losses from selling debt.
The reason is clear, regional banks are looking for liquidity above anything else. Selling bonds at a loss is just one of those formulas, they have also resorted to other types of formulas to achieve it. Clear proof of this is that New York Community Bank has sold 5 billion in mortgage loans to JP Morgan. This same firm has also sold its residential mortgage services business (Flagstar Bank) for nearly $1.4 billion.
Record liquidity
All of these operations, although they may be painful and involve losses, are already having a truly palpable effect on the sector. According to the latest S&P Global report published in October, regional banks “they maintain record levels of capital.” According to their study “the common capital ratio has exceeded 13% for the first time since 2015 and the highest ratio in history (since the regulation of capital requirements). With these figures “it is expected that the large regional banks will have between “3% and 4% more LA liquidity than the regulation requests, including unrealized profits, one of the keys to the large bankruptcies of 2023.”
The agency comments that this is mainly due to two factors. The first is the need for firms to prepare for the new regulation, Basel III Endgamewhich will be applied in July 2025. According to PwC, a 10% increase in capital requirements for regional banks will be required by then.
“These banks are exposed to large losses with the offices”
Aside from this matter, S&P 500 experts believe that regional banks are building a security wall against possible setbacks in commercial real estate. A sector in crisis like that of offices, in which they believe that there may be an explosion of unrealized losses due to non-payments by promoters. Morgan Stanley commented on this in its latest report, alleging that “banks with portfolios of this type (commercial real estate) They are exposed to large losses. We expect long-term high rates to put pressure on credit quality, forcing these banks to build up loss reserves during 2024.”
These liquidity buffers would tend to generate security from which regional bankss can build a stable future. S&P Global commented that “growing capital bases have partly helped reassure bank stock investors, and many are shifting focus to the earnings power of banks.”
For their part, RBC Capital comments that, with this liquidity and the trajectory changes completely. “As these unrealized losses and credit issues resolve… there’s a chance that, in a year or two years, they’ll have more equity at that time and They can use it for buybacks and/or mergers and acquisitions“Regional banks are in a much stronger position after last year’s problems, said Ken Usdin, an analyst at Jefferies. “If we look ahead, in the coming years, banks will see a further recovery of at least a 25% of these unrealized losses, part of which will accelerate in this quarter.” This is what would justify the good evolution that the sector as a whole is having on the stock market. The iShares US Regional Banks appreciates 17% in so far this year and 20% since May.
Repositioning for the future
Although speaking of bond sales, not everything is a matter of generating security. There is also a repositioning thinking about the new type environment. This has been commented on by the companies in the sector themselves, alleging that a good part of the sales at losses are to buy bonds with high long-term returns and be able to protect themselves with these assets for an eventual drop in interest rates, while maintaining high returns ( the ten-year bond, for example, offers 4.2%).
PLC Bank commented that after the large bond sale it had dedicated a part to buying “securities with 400 basis points more profitability than the ones we have sold.” From Hovde Group they comment that “if they have extra cash, bank treasurers who think we are at the top of the cycle may decide to go ahead and lock in long duration bonds so that once we are at a environment of lower rates still perform decently.
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