More US regional banks are taking a step that was unthinkable more than a year ago in the aftermath of the Silicon Valley Bank failure: selling underwater bonds at a loss.
When Silicon Valley Bank did it, it spurred a panic among investors and depositors.
The difference this time around is that regional banks aren’t selling lower-yielding securities to pay depositors. Instead they are preparing for interest rate cuts from the Federal Reserve.
Some cash from these sales is being used to buy new bonds that lenders hope will perform well as rates come down in the coming months or years. The Fed is expected to start cutting rates as early as September.
“If they’ve got extra cash, bank treasurers who think we’re at the top of the cycle may decide to go ahead and lock in long-duration bonds so that once we’re in a lower-rate environment they still have a decent yield,” Feddie Strickland, an equity research analyst with Hovde Group, said.
Locking in 'the swoosh'
Regional banks that announced bond sales in recent weeks include Pittsburgh-based PNC Financial Services Group and Charlotte-based Truist (TFC), two of the top 10 biggest lenders in the US, along with Regions (RF) and Webster (WBS). More are expected to do the same.
PNC took a half billion dollars in losses on its bond sales and reinvented the proceeds into securities with yields "approximately 400 basis points higher than the securities sold," according to the bank.
That raised the bank's confidence that it would reap a record amount of net interest income next year. Such income measures the difference between what a bank earns from its assets and pays out on its deposits — a critical source of revenue for any regional bank.
One analyst on PNC’s second quarter earnings conference call said the uptick over the next year looked like Nike’s "swoosh" logo.
"Essentially, what we've done is locked in some of the swoosh," PNC CFO Robert Reilly told analysts.
PNC's decision to realize bond losses didn’t impact earnings thanks to a one-time stock gain it recorded from its Visa holdings.
Other banks are choosing to take these bond losses even when they aren't able to offset them with one-time quarterly gains.
Truist took a $5.1 billion after-tax loss when it sold bonds that yielded a measly 2.80%.
It used some of the proceeds — $29.3 billion — to buy new bonds yielding 5.27%. The bank now expects its net interest income to be 2% to 3% higher next quarter.
Regions also took a $50 million pre-tax loss to replace approximately $1 billion of bonds.