NEW YORK — Big banks bought securities in recent quarters to put their deposits to work, a strategy that might yield them handsome returns for the second quarter because of the rise in Treasury bond prices.
"U.S. banks' securities books swung to an unrealized gain position in May for the first time since 2005," Goldman Sachs Group Inc. bank analysts wrote in a research report Friday. "Thus, banks have swung from an unrealized loss of $2 billion to an $8 billion gain."
Whether their shareholders will see much of a benefit, though, is another question. Higher Treasury prices would only boost bank profits if they sold the securities and were able to put the funds to work to make loans. But the demand for new loans has been spotty at best in recent quarters, bankers told investors.
Still, the improvement in the value of securities adds to the longer-term positive momentum bankers see for their balance sheets and earnings. Capital levels are stronger, assets are becoming more valuable, and profits will rise as fewer customers default on their loans. In the first quarter, fewer customers added new defaults to banks' loan books, a trend bankers have said should continue.
U.S. banks hold $1.4 trillion in Treasury notes and bonds along with bonds backed by Fannie Mae and Freddie Mac mortgages; $978 billion alone are in so-called agency mortgage-backed securities, according to data by the Federal Reserve. The amount of Treasury and agency securities banks hold rose 17.2% from a year earlier; though so far this year the balance has been virtually flat.
Goldman analysts say some banks could sell securities to lock in some of those gains. "We think banks with a combination of past propensity to take security gains in a falling rate environment and a large rate-sensitive securities book are more likely to recognize securities gains this quarter," Goldman said.
Based on past behavior, Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., PNC Financial Services Group Inc., SunTrust Banks Inc., and Fifth Third Bancorp could be among the beneficiaries. The banks that focus mainly on the trust and transaction processing business, like State Street Corp. and Bank of New York Mellon Corp. are less likely to sell, Goldman said.
All banks mentioned either declined to discuss the matter or didn't immediately return calls for comment.
Goldman concedes that shareholders don't care much for gains from securities sales and are more interested in earnings from the banking business. And Keefe, Bruyette & Woods Inc.'s chief equity strategist, Frederick Cannon, said banks are more likely to stay put. No sale means no impact on profits and capital, but shareholders still benefit because the securities would still have to be marked-to-market and the gains in valuation would affect banks' book values, Cannon said.
"I doubt banks would do much selling of securities here, except perhaps for the few that are still capital constrained, as the selling of higher yielding securities would hurt" profits in coming quarters, Cannon said.
One reason bankers could be enticed to sell securities is if more customers were to borrow. Loan balances at U.S. banks were virtually flat from a year earlier, to $6.4 trillion, according to Fed data, with only credit card loans rising somewhat in April.
"In the main, the direction of loan originations remains negative," albeit at a slower rate of contraction, Richard X. Bove, an analyst with Rochdale Securities, wrote in a research report Friday.
Keefe Bruyette's Cannon said, "Selling securities creates very limited capital" and "the problem the banks have is excess liquidity."