CHARLOTTE, N.C. -- NationsBank Corp. plans to change the way it values the bulk of its $32 billion bond portfolio at yearend, which could increase its equity by $200 million to $300 million.
The Charlotte, N.C., bank will probably consider about $20 billion of the bond portfolio as tradeable securities, rather than as investments that will be held until maturity, said James H. Hance Jr., chief financial officer.
As a result, the value of those securities on the balance sheet will reflect their market value rather than the historical cost.
Response to Accounting Rule
NationsBank's planned shift in the valuation of its portfolio is a response to a new accounting rule for securities investments that banks and other corporations must adopt by the first quarter of next year. Some banks are adopting the new rule, Financial Accounting Standard 115, this quarter.
Billions of dollars of equity are expected to cascade onto bank balance sheets as the accounting rule is adopted. That's because banks have billions of dollars of paper gains in their investment portfolios, and under the new rule some of these gains will be added to equity. Income will not be affected.
The windfall in equity will reduce bank's reported return on equity, said Anthony Davis, an analyst with Dean Witter Reynolds.
In addition, the increased impact of bond gains and losses on equity will also make reported equity levels more volatile, said Sandra Flannigan, an analyst with Merrill Lynch & Co.
NationsBank has the inductry's largest investment portfolio and is one of a few large banks that have detailed their plans for adopting the new rule.
Adopting the rule could increase NationsBank's equity "by about several hundred million dollars," depending on market conditions, said Mr. Hance.
Equity of $9.4 Billion.
NationsBank had $270 million in paper gains in its bond portfolio at the end of September. A $200 million gain would equal about 2% of the bank's current equity of $9.4 billion. The bank has not decided on the exact amount that will be marked to a market value, said Mr. Hance.
SunTrust Banks has been one of the few other large banks to disclose its plans for adopting the new rule. SunTrust has about $1.2 billion in unrealized gains on its holdings of bonds and Coca-Cola Co. stock. These securities will be reported as "available for sale" in the fourth quarter, giving the company a whopping $800 million addition to equity.
"Everybody is waiting around to see how others are going to settle the issue," said Raphael Soifer, analyst with Brown Brothers Harriman & Co.
The new accounting rule forces banks to make a bigger part of their portfolios reflect market prices. Under both the new rule and the current one, bonds that are classified as investments are valued at cost.
The new rule makes it more difficult to hold bonds in an investment account. The rule is more explicit than current accounting standards in saying securities in this account must be held to maturity, said Moshe Ohrenbuch, analyst with Sanford C. Bernstein & Co.
Most securities that cannot qualify as long-term investments must be classified as "available for sale." Changes in the market price of these securities add or deduct from equity.
Under the current rule, which is being replaced, securities classified as "held for sale" are valued at the lower of cost or market. If those investments fall in price, that's reflected in earnings, even if the investments aren't sold. Bonds that gain in value don't affect earnings.
Goal of Flexibility
NationsBank is shifting securities from the investment account to one held for sale for more flexibility in its portfolio management, said Mr. Hance.
The 25 banks with the largest bond holdings valued at market at June 30 had $6 billion in unrealized gains, equal to 6.41% of equity capital, and the industry had a total of $22 billion in paper gains, according to Ferguson & Co.