Wells Fargo and JPMorgan Chase, the most profitable US banks, lost $6.5 billion (R65bn) in combined equity in the second quarter as rising interest rates and falling bond prices threaten capital levels across the industry.
JPMorgan suffered a $3.1bn decline in accumulated other comprehensive income (AOCI), a measure of shareholder equity, in the second quarter while Wells Fargo reported a $3.35bn hit, according to results on Friday. The equity figure includes unrealised security gains, which fell to $5.1bn at Wells Fargo from $11.2bn at the end of March.
Bond losses sparked by rising interest rates may force banks to hoard more profit as they build capital to meet stricter regulatory requirements. Pending rules let lenders count unrealised bond gains as core equity in regulatory capital calculations, reducing the need to sell shares or retain earnings.
“The banks want that in their capital levels,” said Todd Hagerman, a Sterne Agee & Leach analyst and former Federal Reserve bank examiner. “If they lose that they have to raise that much more equity.”
Accounting rules require banks to record unrealised gains and losses from securities characterised as “available for sale” under AOCI.
Those are excluded from net income and counted in balance sheet equity instead. Under the Basel 3 rules proposed by the Basel Committee on Banking Supervision, tier 1 common equity will include AOCI.
Bond losses were sparked by rising interest rates after US Federal Reserve chairman Ben Bernanke indicated on May 22 that the central bank could slow bond purchases as employment improved. Ten-year treasury yields rose from this year’s low of 1.63 percent on May 2 to 2.74 percent on July 5, the highest since August 2011.
At JPMorgan, AOCI dropped to $389 million in the second quarter from $3.49bn in the first quarter, according to figures on the bank’s website. Wells Fargo’s tally fell to $1.8bn from $5.15bn.
Even with the slide in bond values, second-quarter earnings at the two banks were strong enough to boost the firms’ total capital levels. JPMorgan boosted net income by 31 percent to $6.5bn from the year-earlier period. Wells Fargo said profit climbed by 19 percent to a record $5.52bn.
JPMorgan’s Basel 3 tier 1 common ratio rose to 9.3 percent at the end of last month even with a 0.2 percentage point hit tied to security losses, chief financial officer Marianne Lake said.
“Higher long-term rates and wider spreads drove a significant reduction in the unrealised gains in our securities portfolio,” Lake said.
Wells Fargo’s ratio rose to 8.54 percent, even with a 0.24 percentage point decline tied to the drop in other comprehensive income. – Dakin Campbell in San Francisco for Bloomberg