The value of derivatives used by major banks for asset and liability management fell by billions of dollars in the first quarter, according to statistics gathered by Sanford C. Bernstein & Co.
But Bernstein analysts argued that the volatility was hardly cause for alarm, and suggested that there may be a buying opportunity, to the extent that uneasiness about derivatives has dragged the banks stock prices lower.
Analyst Moshe Orenbuch noted that the declines "are not big, big numbers," considering the asset sizes of the banks involved.
Besides, Mr. Orenbuch and money-center analyst Ronald I. Mandle said, the banks' investment in derivatives for the most part worked they way they were supposed to: The losses were at least partially offset by gains in the value of core deposits as interest rates rose.
"Banks have entered into billions of dollars of derivatives transactions for hedging the economic risk of having important amounts of core funds on their balance sheets," the analysts said in a statement to their clients. "Core deposits made many banks' assets more sensitive than they wished to be. [The] derivatives helped satisfy their craving for additional liability sensitivity."
Morgan Stands Out
The analysts said that 21 of the 22 banks with large derivatives portfolios saw the value of their portfolios fall dramatically. The value of J.P. Morgan & Co.'s portfolio remained unchanged.
The analysts said the largest decline was at BankAmerica Corp., whose portfolio lost $1 billion in market value.
At the end of the first quarter, BankAmerica's derivatives portfolio, with $68.3 billion in notional value, carried a market value of $200 million. At yearend 1993, the notional value stood at $46.2 billion and the market value at $1.2 billion.
Citicorp, which held derivatives with a notional value of $168 billion, saw the market value of its holdings decline by $900 million in the first quarter of 1994. At yearend 1993, Citicorp's portfolio, with a notional value $131.5 billion, had a market value of $1.1 billion.
The market value of Bankers Trust New York Corp.'s derivatives holdings fell by $466 million, to $251 million. The notional value of the portfolio stood at $32.6 billion
The market value of J.P. Morgan's portfolio, with $252.2 billion of notional value, remaineds, stable at $1.2 billion.
The analysts said the declines faced by Bankers Trust New York Corp. and Citicorp reflected the reduced values of their derivatives, but was somewhat offset by the increased value of their core deposits. But the offset was less than it could have been, they said, because of their relatively low amount of domestic core funding.
"Two-year interest rates have risen another 0.75% in the second quarter," they noted. "This advance should mean a further decline in market value of [asset-liability management] derivatives and in securities portfolios. Partially offsetting these lower values should be further trading account profits, gains on sales of securities, and higher economic value of core deposits."
They also pointed out that a rebound in trading profits from their disastrous levels in the first quarter should lead to gains in operating earnings per share for the second quarter at all moneycenter banks.
"The third quarter already is starting out strong for trading profits," Mr. Orenbuch pointed out. "Bank stocks are up because the losses have already been incurred. The market is not stupid."
Citicorp stock on Wednesday rose 75 cents to $39.875.
BankAmerica was down 50 cents to $46, and Bankers Trust was unchanged at $68.375.
J.P. Morgan gained 37.5 cents to $62.75.