CHICAGO - Nervous investors have distanced themselves from Midwest bank stocks following Banc One Corp.'s recent disclosure of a $170 million fourth-quarter charge for securities losses, even though no other bank in the region is expected to take a hit of that magnitude.
It is understandable that investors are tarring all banks with the same brush. There is so much diversity in the postures id reporting practices of various banks that comparing balance-sheet positions from one to the next is nearly impossible.
Although Banc One posted some $1.3 billion in unrealized pretax losses on derivatives and securities available for sale at Sept. 30, experts say the real issue confronting the company was whether it had offsetting unrealized gains on the liability side of the balance sheet.
Such gains and losses occur as rate gyrations change the discount rates and timing of expected cash inflows and outflows, making the net present values of assets and liabilities diverge from book values.
In taking the special charge, Banc One acknowledged there was an imbalance. And this imbalance in large measure was the product of a derivatives-fueled strategy that had liabilities rolling over faster than assets, experts say.
Tanya Azarchs, a bank rating analyst at Standard & Poor's Corp., said the market prefers that banking companies "close out liability-sensitive positions," to cap exposure to further interest-rate hikes. But policing this issue is a daunting task.
For example, Cleveland-based Keycorp Inc. told the Securities and Exchange Commission that its liability-sensitive posture "was moderately in excess" of the corporation's guidelines at Sept. 30.
But Keycorp essentially told the SEC it wasn't going to do anything about the situation, stating that "management believes its current rate sensitivity level to be appropriate."
Keycorp has been shifting rate-sensitive securities into the "held-to-maturity" accounting classification. In the third quarter, for example, it reclassified $2.3 billion of mortgage-backed securities, to "held to maturity" from "available for sale"
While this in no way affects the company's cash-flow characteristics, it can help minimize mark-to-market accounting losses that must be posted to the company's equity account.
For example, the $58 million unrealized loss on the securities transferred in the third quarter will now be amortized over the remaining lives of the investments as a "yield adjustment."
The drawback to this approach, however, is that it compromises flexibility. The $320 million of total unrealized pretax losses embedded in Keycorp's held-to-maturity portfolio at Sept. 30, and the mismatch this deficit potentially represents, can't be cured by selling securities.
Other alternatives - such as the massive purchase of interest rate caps, for example - aren't nearly as clean as simply getting under-earning securities off the books.
Henry C. Dickson, a banking analyst with Smith Barney, said the market "clearly is uncomfortable" with Keycorp's liability sensitivity, but he said its accounting practices might prevent it from clearing away uncertainties as straightforwardly as did Banc One.
Minneapolis-based Norwest Corp., by contrast, has concentrated the preponderance of highly rate-vulnerable securities in the available-for-sale category, where disparities between book and market values are posted to the company's equity account.
John T. Thornton, Norwest's chief financial officer, said this accounting posture maximizes flexibility. Although Norwest posted $52 million of net securities losses in the third-quarter "related to repositioning portions of the investment portfolio," Mr. Thornton said this was driven by a desire to lock in higher market yields, not by a maturity mismatch.
Mr. Thornton says Norwest has been "fairly well matched" in terms of rate sensitivity for quite some time. However, Norwest did not include gap and sensitivity analyses in its third-quarter SEC filing.
Even banking companies that provide these analyses don't do so in a consistent format, making it difficult to compare individual strategies in the same context.
For example, Detroit-based NBD Bancorp discloses estimates of how a gradual, 100 basis point rate change over four months would affect net interest income over 12 months. By contrast, First Bank System, Minneapolis, looks at how an immediate 100 basis point rate hike would affect forecasted net interest income.
And Cleveland-based National City Corp. provides estimates on how a 200 basis point rate hike over 12 months would affect net interest income during the same period.
Even if the disclosures and accounting treatments were identical, uncertainties about margins and rate exposure still would abound because of wide disparities in the maturity and yield characteristics of assets and liabilities, and in management assumptions about the direction of rates.
Detroit-based Comerica Inc., for example, finished the third quarter in a position of asset sensitivity but still saw its net interest margin contract because it used comparatively costly nondeposit sources to fund a goodly portion of earning-asset growth.
And the consequences of Banc One's mismatches would not have been nearly so severe had it been able to preserve loan spreads. A 13% year-to-year expansion of quarterly average total loans and leases doubtlessly would have provided far more comfort to the company and its investors had not average yields dropped by 61 basis points, to 9.02%.
Despite. the fog surrounding rate sensitivity, some Midwest institutions have come through fairly cleanly.
First Chicago Corp. has had a longstanding policy of maintaining neutrality in its balance sheet. First Bank System, with memories of a 1980s mismatch debacle seared into its corporate memory, also plays it safe.
Other institutions report marked progress in reducing liability sensitivity, including National City.
NBD said $3 billion more in liabilities than assets would reprice over the next six months, an amount equaling 7.3% of earning assets. But it said the negative gap falls sharply, to 0.4% of earning assets, when the time horizon is extended to 12 months.
