[ad_1]
(Bloomberg) — U.S. banks have erased $150 billion of unrealized losses since the start of the third quarter and roughly halved them through 2022, according to Wells Fargo & Co. analyst Mike Mayo, a “glimmer of hope” for the industry as economic growth slows.
According to Mayo, the boom in the bond market helped correct unrealized losses on securities due in 2022 to about $300 billion from a peak of about $700 billion. Paper losses were a major concern for investors during last year’s regional banking crisis, and it continued to raise concerns as interest rates remained at higher levels for longer than many analysts had forecast.
“This new environment — if it persists — has many good things in store, such as much lower securities losses, greater capital flexibility (barring a hard landing), and an end to the analytical paranoia about unrealized securities losses that will accompany the industry in 2023,” Mayo wrote in a note Monday. “Unrealized losses” have been a burden on banks, resulting in lower capital formations and fewer buybacks.”
U.S. banks’ unrealized losses on their held-to-maturity and available-for-sale securities portfolios exceeded $500 billion at the end of the first quarter, according to data released by the Federal Deposit Insurance Corporation in May.
When banks flooded with deposits during the pandemic, many people piled them into Treasurys and mortgage bonds, which dropped in price as rates rose. Unrealized losses on those positions were concentrated during last year’s regional banking turmoil, and low-yield securities books are pressuring profits. The improvement could also increase the likelihood of takeovers in the industry, according to Mayo.
On Monday, officials at regional lender KeyCorp said they plan to use a portion of the investment they received from the Bank of Nova Scotia to reposition its securities portfolio, which would boost earnings.
“There is still much work to be done, but low rates and a steady flow of maturing balances are a positive,” Mayo wrote.
More stories like this are available on bloomberg.com
[ad_2]
