More US banks are opting to recognize losses on their underwater securities in favor of improving their future profitability.
According to an S&P Global Market Intelligence analysis of major exchange-traded US banks, 211 out of 257 banks recorded either percentage or dollar amount decreases in their available-for-sale (AFS) securities. The broad-based decline comes as many banks move to sell securities at a loss in hopes of boosting their future earnings, margins and capital ratios. Equity analysts expect the trend to continue into 2024.
"[Banks] with the flexibility to improve revenue trends via balance sheet actions could be a theme through early next year, depending on how the yield curve and the Fed outlook trends," Hovde analysts wrote in a Nov. 7 note. Just last month, the Hovde analysts recommended that banks consider such action "if capital is plentiful and the payback is less than two years," they wrote in an Oct. 16 note.
"For those that are earning a minimal spread relative to the cost of funds, the narrative could improve on the forward [net interest margin], assuming management has the capital and the will to break the budget or find offsetting gains," they wrote.
Strategic sales
John Marshall Bancorp Inc. reported the largest quarterly percentage decrease in AFS securities among banks in the analysis at 48.0% after selling securities with a par value of $161.2 million in July. The company plans to use the proceeds from the sale on higher-yielding assets, which will improve its future earnings power and capital ratios, according to a July release.
SmartFinancial Inc. reported the second-largest quarter-over-quarter percentage decline in AFS securities of 28.7% after it sold nearly $160 million in securities during the quarter.
"We thought it was a pretty good move on our part to go ahead and just recognize this loss to get the earnings under key to keep our [net interest margin] stabilized," CFO Ronald Gorczynski said during the company's third-quarter earnings presentation.
"We like the timing and what the trade did for our forward-looking balance sheet," President and CEO Billy Carroll Jr. said. "This, along with the large cash flows coming in early 2024, puts us in a very favorable spot."
The restructure, along with $184 million in securities maturing by the second quarter of 2024 and the repricing of $79 million in fixed-rate loans, should "provide tailwind" to the company's yield in future quarters, Janney Montgomery Scott analyst Feddie Strickland wrote in a note on the securities sale. SmartFinancial should see "nice [net interest margin] expansion" going forward,
Street's applause
At a time when "capital is king," according to the Hovde analysts, the Street is reacting positively to banks selling securities at a loss. "It was clear banks with higher capital ratios could be more in favor going forward," Hovde analysts wrote in the Nov. 7 note following their financial services conference.
"This transaction gives us some tools in our tool kit to allow us to improve," Chairman and CEO James Rollins III said during the company's third-quarter earnings presentation.
Capitol Federal Financial Inc.'s stock price also jumped after announcing a securities repositioning.
The Topeka, Kan.-based company sold $1.3 billion of securities, or 94% of its portfolio, during the third quarter, which should boost its EPS by 30 cents and its net interest margin by 60 basis points in 2024. Capitol Federal also plans to pay down borrowings with the proceeds to bring its asset size back below $10 billion at Dec. 31 so it can avoid the impact of crossing the threshold, according to its earnings release.
The sale led the company to report a net loss of $150.5 million for the quarter, but its stock still jumped 11.6% because the restructuring "provides a big boost," Piper Sandler analyst Andrew Liesch wrote.
