Dear Investor,
You little question have some concerns in regards to the bank at which you retain your deposits.
I mean, why wouldn’t you? Three of the biggest bank failures in U.S. history have already taken place this yr. And by the look of things, there are much more to come back.
So today we’re going to do a fast break down of the way to analyze a bank to see if it’s in trouble. That is NOT meant to be an exhaustive lesson on accounting, but simply an honest rule of thumb to enable you work out if a bank is in deep trouble so far as its bond portfolio is worried.
As I’ve already outlined earlier this week, 2022 was the worst yr on record for long-term Treasury bonds. This has been an enormous problem for banks which own lots of of billions, if not trillions of dollars’ price of long-duration bonds and loans that move based on what happened with Treasuries. Unless the banks hedged this risk, they’re likely sitting on substantial losses of their long-duration portfolios.
Now, by law, every bank has to report the losses or gains on lots of the assets it owns. These are recorded as “unrealized” gains or losses within the case of the assets that the bank still owns/ has yet to sell.
See for yourself.
Below is a screenshot from the income statement of a bank. As you’ll be able to see, the full amount of unrealized losses ballooned in 2022, likely because of this of those assets dropping in value when the bond market collapsed. As of year-end 2022, this bank is sitting on $952 million price of unrealized losses.
Now, that appears like quite a lot of money in “unrealized losses,” but every thing is relative. So to see if it is a major issue we’d like to evaluate that number against the bank’s shareholder equity (the stock owners).
On this particular instance, the bank in query has shareholder equity of $3.9 billion. So put one other way, this bank is sitting on unrealized losses equal to 25% of shareholder equity. That’s a fairly large deal, which might suggest this bank could find itself in trouble.
All of this information will be found on the SEC’s website. Simply go there, type within the symbol on your bank, then go to its annual or quarterly financial statements (the 10-K or 10-Q). You’ll be able to even do a “search” function in those files for the terms “unrealized losses” or “shareholder equity” to search out the particular parts it’s essential to see.
I hope this helps!