Facing lackluster loan growth, the nation's largest banks have deployed more cash into bonds and increasingly have sought to shield those portfolios from swings in market values that would come with increases in interest rates.
Large banks classified as U.S. global systemically important bank holding companies, those with more than $700 billion in assets, have placed more than 60% of their bond portfolios in held-to-maturity, or HTM, portfolios. Unlike available-for-sale, or AFS, portfolios, banks do not have to mark HTM portfolios to market on a quarterly basis.
Changes in the value of AFS portfolios flow through accumulated other comprehensive income, or AOCI, and impact tangible common equity. For banks over $700 billion in assets, changes in AOCI impact regulatory capital as well.
Banks over $700 billion in assets seem keenly aware of the potential capital hit that could stem from increases in interest rates and have placed far more securities in their HTM portfolios over the last year. Among those institutions, HTM securities have grown more than 140% over the last four quarters, increasing the portfolios to 60.5% of their total securities in the second quarter from 52.1% in the prior quarter and 33.1% a year ago.
Meanwhile, HTM securities at banks with less than $700 billion in assets have risen modestly, ticking up to 14.2% of their total securities in the second quarter from 14.0% in the prior quarter and 13.8% a year ago.
Bank managers continue to find themselves with piles of cash and few yield opportunities to put those funds to work unless they are willing to reach further out on the yield curve. Many investors are fearful that interest rates could eventually rise notably from current levels due to rising inflation and if that occurred, longer-duration securities would likely come under considerable pressure.
If higher rates come to pass, prices of many bonds that banks own likely would come under pressure and negatively impact accumulated other comprehensive income. For global systemically important banks, or GSIBs, such a development would be far more punitive since they already face higher capital requirements and changes in AOCI impact their regulatory capital ratios.
Some of the nation's largest banks reported sizable increases in their HTM portfolios over the last year. Bank of America Corp. and JPMorgan Chase & Co. continued to build their HTM portfolios in the second quarter, growing the books by close to 142% and 368%, respectively, year over year.
JPMorgan CFO Jeremy Barnum said on the company's second-quarter earnings call that the changes in allocation to HTM portfolio are "primarily about managing capital across the various constraints while preserving the right level of flexibility to do deployment." The executive further noted that the company is bullish on the economy and expects higher inflation and interest rates in the future.
"And in light of that, we're happy to be patient right now," Barnum said on the call.
While relying on HTM portfolios is far more pervasive among the largest banks, some non-GSIB institutions have taken the same approach. SVB Financial Group, which had $163.4 billion in assets at the end of the second quarter, grew its HTM portfolio more than 360% from year-ago levels.
SVB Financial, like most banking institutions, has received a huge influx of liquidity over the last year. The company has sought to deploy some of that cash in longer duration bonds — three to five years — to pick up some yield and has placed those securities in its HTM portfolio. Meanwhile, SVB says it has invested in shorter-duration assets in its available-for-sale portfolio.
While HTM portfolios have grown, banks' AFS securities portfolios still hold the majority of bonds owned by the industry. As long-term interest rates rose off historic lows in the first quarter, the values of bonds in AFS portfolio came under pressure. Long-term rates fell in June, the last month of the second quarter, supporting values of bonds in AFS portfolios.
In the second quarter, institutions including U.S. commercial banks, savings banks, and savings and loan associations that file GAAP financials reported $21.4 billion in unrealized gains in their AFS portfolios, compared with $17.0 billion in unrealized gains in the first quarter of 2021.
Gains in AFS portfolios likely have increased during the third quarter as long-term rates have declined since the end of the second quarter. The Federal Reserve's H.8 data, which tracks all commercial bank balances, shows that the group reported $40.2 billion in unrealized gains through the week ended Sept. 1. Values in portfolios have risen since June 30, when institutions reported $33.6 billion in unrealized gains, according to the Fed data.
Those gains have risen as the yield on the 10-year Treasury has declined in recent months. The yield on the 10-year Treasury averaged 1.59% in the second quarter, up from 1.34% in the first quarter. Since the end of the second quarter, the yield on the 10-year Treasury has averaged 1.30%.
