Maturing securities and portfolio management are taking some of the sting out of the impact of higher interest rates on the value of banks' bond holdings.

As expectations for a rapid series of cuts by the Federal Reserve have evaporated, rates across the curve have rebounded this year, compounding unrealized losses on banks' available-for-sale (AFS) portfolios. For the 15 largest publicly traded banks in the US together, accumulated other comprehensive income (AOCI), which captures such losses, worsened $6.26 billion sequentially to negative $144.52 billion in the first quarter, according to data from S&P Global Market Intelligence.

Eight of the banks posted sequential improvement in tangible common equity per share nonetheless, and all posted year-over-year gains. Average Treasury rates across two-year to seven-year maturities, which move inversely with bond prices, were considerably higher at the end of the first quarter than they were the year prior, though they have fallen from recent peaks late in 2023. Tangible common equity reflects earnings and capital distributions in addition to AOCI.

Tangible book values were flat quarter over quarter "as banks have taken action to shorten duration and add hedges on securities books," Jefferies analysts said in a May 3 note reviewing first-quarter results for large- and mid-cap banks. "We expect unrealized losses to gradually accrete back over time as the underlying bonds are repaid or approach maturity. However, for any given quarter, AOCI could swing in either direction driven by long-end rate moves."

Restructurings

First-quarter data on banks' bond books also shows the impact of another batch of loss trades, where banks sell low-yielding securities, realize losses, and use the money to pay off high-cost debt or move into higher-yielding assets.

Berkshire Hills Bancorp Inc., Sierra Bancorp and Riverview Bancorp Inc. were among the banks that executed such repositionings during the first quarter and posted some of the largest sequential decreases in AFS portfolios for the period, ranging from 27.1% to 38.8%.

After the quarter ended, Truist Financial Corp. completed the sale of its large insurance brokerage and used a big chunk of the capital generated by the transaction to support a securities repositioning it had previously outlined. The bank sold $27.7 billion of lower-yielding securities and added $18.7 billion of shorter-duration securities yielding 5.27% and $20.7 billion of cash.

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Portfolio builds

Some banks continued to add to AFS holdings, reflecting liquidity considerations in some cases and deposit growth that has outrun loan growth in others.

East West Bancorp Inc.'s AFS securities increased 35.7% sequentially as it added floating rate bonds to boost its liquidity. "Our cash and securities portfolio rose to 23% of total assets, a level of on-balance sheet liquidity we see as appropriate at our current size," CFO Christopher Del Moral-Niles said during a conference call.

First Citizens BancShares Inc.'s AFS securities were up another $4.98 billion, or 25.0% sequentially, as it continues to rotate out of elevated cash levels resulting from its acquisition of the failed Silicon Valley Bank. "We're sitting slightly light on investments, but you've seen us deploy cash into the investment portfolio over the last three quarters, and we would expect to continue to do that maybe to the tune of $3 billion to $4 billion before the end of the year," CFO Craig Nix said during a conference call.

Bank of America Corp. expanded its AFS securities portfolio again as deposit growth continued to outstrip loan growth and its portfolio of held-to-maturity securities, which has racked up large unrealized losses that are not included in AOCI, pays down. The bank's AFS securities are mostly hedged with yields similar to cash.

Q2 so far

Interest rates are up again so far in the second quarter, putting further pressure on bond prices, but markets still anticipate a cut by the Fed by the end of the year.

"In the past few quarters, many banks have been allowing securities run-off to sit in cash, but this may pivot with the likelihood of the next rate move being a cut," the Jefferies analysts said.