Threats to holding to maturity are liquidity and/or the need to sell investments in losing positions. Luckily, deposits keep growing, and we have some investments in this account that could be still sold for a profit as technically we don’t have to hold all of these low-yield assets to maturity.
Back to reality
Now that we have a handle on this issue, let’s look take a look at Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), and JPMorgan Chase & Co (NYSE:JPM) to see just how this major accounting standard has affected them recently.
In the most recent quarter, Bank of America Corp (NYSE:BAC) reported net income of almost $3.6 billion, but also a negative $4.2 billion fair-value adjustment on available-for-sale securities hit equity at the same time.
Ironically, the bank sold some of these securities for a $457 million gain during the same time period — real gain, not an adjustment. At the end of the second quarter, the accumulated unrealized loss associated with available for sale securities stood at $645 million.
Wells Fargo & Co (NYSE:WFC) reported $5.27 billion in net income this last quarter and posted a negative $3.8 billion fair-value adjustment on its balance of available-for-sale investments. The bank currently holds $249 billion in this account with an unrealized gain of roughly $3.2 billion. On the income side, Wells Fargo & Co (NYSE:WFC) lost $54 million on actual sales in the second quarter, not $3.8 billion.
JPMorgan Chase & Co (NYSE:JPM) has the largest amount ($355 billion) invested in available-for-sale securities whose fair-value adjustments (a loss of $3.1 billion) also cleared the company’s reported net income of $6.1 billion. An actual gain of $124 million was reported during the second quarter on sales of these securities. JPMorgan Chase & Co (NYSE:JPM) currently has an unrealized gain of $3.1 billion in equity associated with these accounts for now.
Bottom line
The reversal of historic low interest rates has the potential to offset years of reported incomes due to fair-value adjustments on a bank’s available-for-sale securities account.
While these “potential” losses reflect fair value, they also quantify the incentive that a bank has to simply let these securities mature and negate any actual loss. When looking to invest in a bank, it’s important to keep this in mind, because all banks are not equal in liquidity and the ability to save these “losses.” Those that can hold out may just be storing up some hidden value for potential and current investors.
The article Demystifying 3 Banks “Losing” Billions originally appeared on Fool.com is written by joshua kubiak.
Joshua Kubiak has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo.
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