Banks Clawed Back $150 Billion of Losses in Six Weeks, Mayo Says

(Bloomberg) -- US banks erased $150 billion of unrealized losses since the start of the third quarter and have shrunk them by nearly half since 2022, offering a “silver lining” for the industry as economic growth slows, according to Wells Fargo & Co. analyst Mike Mayo.

A bond market rally helped improve unrealized losses on securities by roughly $300 billion from a peak of nearly $700 billion in 2022, according to Mayo. The paper losses were a major concern for investors during last year’s regional banking crisis, and continued to raise concern as interest rates held at high levels for longer than many analysts had predicted. 

“This new environment — if it holds — has a silver lining of much lower securities losses, greater capital flexibility (ex-hard landing), and the end of the analytical lunacy around unrealized securities losses that accompanied the industry in 2023,” Mayo wrote in a note dated Monday. The unrealized losses “have been a drag on banks, resulting in capital builds and fewer buybacks.” 

US banks’ unrealized losses on held-to-maturity and available-for-sale securities portfolios sat at more than $500 billion at the end of the first quarter, according to data released in May by the Federal Deposit Insurance Corp.

When banks were flooded with deposits during the pandemic, many piled them into Treasuries and mortgage bonds that declined in value when rates shot higher. Unrealized losses on those positions were thrust into focus during last year’s regional banking turmoil, and the low-yielding securities books have been a drag on profits. The improvement could also make acquisitions more likely in the industry, according to Mayo.

On Monday, executives at regional lender KeyCorp said they plan to use part of an investment from Bank of Nova Scotia to reposition their securities portfolio, which would boost earnings. 

“There is still a ways to go, but lower rates and continued runoff of maturing balances are a plus,” Mayo wrote.

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