(Bloomberg) -- US banks made progress in making sure the paper losses that piled up during last year’s industry turmoil never become real ones.
Virtually all of the lenders in KBW’s two main bank indexes reported that unrealized losses in their portfolios shrank in the third quarter. It’s the first time that has happened since the 2023 crunch that led to three of the four largest bank failures in the US, according to data compiled from company filings.
As a group, the top 30 regionals reported a decrease of about 25% from the second quarter and a 44% improvement from a year earlier on losses for accumulated other comprehensive income, or AOCI in bank lingo. Figures were similar for the next tier of regional and community banks, with smaller but substantial improvements as a group for the nation’s six biggest money-center banks.
The category can reflect changes in items such as derivatives, currency and pension obligations, but the bulk of AOCI deficits typically reflected unrealized bond losses.
The improvement eases the threat from bonds that bankers bought back when interest rates were closer to zero. As rates jumped in 2022, the value of those securities tumbled because they were earning so little compared with newer issues. Drops in interest rates from the highs of 2023 have helped restore some of the lost value, according to bankers.
The unrealized losses were only on paper, but they became very real for some banks when depositors made withdrawals en masse in search of higher yields from safer sources. To pay off those customers, some lenders had to sell bonds at depressed prices.
Although money-center banks were largely unshaken by their AOCI deficits, analysts and regulators had been concerned that 10 straight quarters of high unrealized losses might leave more regional and community banks vulnerable to shocks. This prospect has faded along with the decline in interest rates, and because those bonds are now a year closer to maturity, when the proceeds can be reinvested and produce more income.
Some lenders like KeyCorp have hustled the process along by unloading a portion of their losers while bond prices were rallying. The Cleveland-based lender said in September it sold about $7 billion of low-coupon investment securities that had yielded about 2.3%.
KeyCorp took an after-tax loss of $737 million, but the sale helped to chop AOCI in half from year-earlier levels, and the bank has said it expects to sell a similar amount in the near future. Meanwhile, the reinvested proceeds from the first batch should add $40 million to the fourth quarter’s net interest income.
“We felt very good about that repositioning,” Chief Financial Officer Clark H. I. Khayat told investors during the third-quarter earnings call. “That will aid us going forward.”
At least one bank, Seattle-based Washington Federal parent WaFd Inc., is showing a positive number overall for AOCI. Chief Executive Officer Brent Beardall credits decisions that the company made in March 2020 to do the opposite of what its peers were doing. For example, it locked in $1 billion of liabilities for 10 years at 0.65% instead of getting stuck with long-term assets at similarly low rates. It also used derivatives to counter what would have been a floating-rate liability.
“In hindsight,” Beardall said via email, “the biggest thing we did right was to zig when others were zagging.”
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