In view of recent bank failures, a BankFocus research paper analyzed unrealized losses in Hold-to-Maturity (HTM) investments of leading commercial banks in the 30 US banks, 30 Eurozone banks and 10 UK banks.
In the research paper, we noted that the US banks are more exposed to the potential impact of higher interest rates on the valuation of their securities. This is due to the higher balances of HTM and Available-for-Sale (AFS) securities on their balance sheets compared to their UK and Eurozone peers. The deposit growth rate of the US banks was higher compared to their peers without corresponding growth in loans. The annual growth rate in deposits was also the highest in the US exceeding 25% in 2020, however this has recently subsided. Nevertheless, even the latest deposit growth rate at 10% for US banks was higher than that for their Eurozone and UK peers in 2022.
Deposit growth rates in the US have been high
Compared with the high deposit growth rates in the US, customer loans grew more modestly - below 10% between 2018 and 2021. However, loan growth picked up at 15% while deposit growth started to subside for the US banks in 2022. In contrast, growth rates in deposits and loans were more aligned for the Eurozone and UK banks during the same period. This required the placement of extra liquidity in non-lending assets.
The Eurozone and UK banks invested excess liquidity in cash equivalents
The US banks kept the lowest percentage of cash balances to their assets at 7% compared to their global peers, despite some uptick in 2020/21. In comparison, the Eurozone banks increased their cash balances during the pandemic years with the latest ratio above 18% of total assets. The UK banks broadly maintained stable cash balances over the past five years with the latest ratio above 14%. Instead, the US banks maintained high securities holdings as a percentage of their total assets since 2018. Recent analysis shows total securities exceeded 22% of total assets for U.S banks. In comparison, the Eurozone banks maintained their securities holdings largely stable at 16%, similar to the UK banks which kept the indicator just below 14% since 2018.
In summary, the higher interest rate environment is likely to affect the valuation of securities in all three regions. However, we expect that the negative valuations and unrealized losses to be the highest in US banks. This is mainly due to the higher balances of HTM and AFS securities compared to the UK and Eurozone banks. However, the US banks have a higher profitability cushion to absorb losses on their assets compared to their Eurozone and UK peers. This is indicated by their superior Return on Average Assets (ROAA) at above 1.2% as of the end of 2022. The average ROAA for the UK and Eurozone banks ranged from 0.4% to 0.5% as of end-2022.
Moody’s Analytics BankFocus provides tools to assess these unrealized gains or losses as reported by banks, click to learn more about BankFocus.