Why some banks decided now was the time to sell Visa stock | Payment sources

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Banks are tapping into the Visa piggy bank again, trying to plug holes in low-yield investments that in some cases are likely to be regretted.

The sale of shares in the payments giant, whose value has soared 1,600% since its initial public offering in 2008, has been beneficial for some banks: Rebuild your underwater bond portfolio.

These banks now realize the value of their bonds when interest rates rise, effectively incurring a loss when the bonds are sold, whereas previously they had an “unrealized loss.” The decision to dump bonds could be painful, as it lowers banks' capital levels and leaves them with less cushion to deal with potential economic turmoil.

But if banks can offset these losses with gains elsewhere, by selling Visa shares, for example, they can manage to get out of ill-timed bond investments without much damage. And you'll be freed from low-yielding bonds and able to reinvest that money in better ways.

“I think it makes sense to monetize it when you need to,” Hovde Group analyst Brett Labatin said of the bank's Visa stock.

The sale is an example of banks coming up with “creative ways to fill the void left by the sale of underwater securities,” said consultant and founder Paul Davis. Bankslate Blog. Bank sells much-needed insurance businessas Truist Financial I did it this yearis another option.

One downside for banks offloading Visa stock is that while these one-time measures may help this cycle, they won't be available in the future.

“If you're taking out a hammer and breaking into your piggy bank to get through this situation, how prepared are you to handle the next situation?” Davis said. “At the end of the day, I think it’s really important to really think about the big picture and the long term.”

Not all banks have this option available.Many of them sold their Visa shares long ago, and the move helped them navigate The economic crisis occurred about 10 years ago. Some companies may still cling to their stock, not feeling the need to follow suit with competitors' debt restructuring deals.

Some banks face sales restrictions as a result of provisions that expose them to visa-related litigation. As these lawsuits come to a close, Visa is loosening these restrictions, opening the door for further sales in the near future.

A Visa spokeswoman declined to comment on the bank sale.

Banks that have sold stakes in payment networks in recent months include Florida's Seacoast Banking. Marin Bancorp Bank of California. Honolulu's first Hawaiian restaurant. Arrow Financial, Glens Falls, New York;

Although details vary, the sale will help banks rebuild their bond portfolios without taking a big hit to their capital. This move will also lead to higher profits for banks, as they will be able to replace the low-interest bonds that are squeezing their profits with high-interest bonds.

First Busy of Champaign, Illinois, previously sold underwater securities with a yield of 1.56%. The company deposits its cash with the Federal Reserve, which pays banks 5.4% interest on reserve balances. Busey Bank's parent company suffered a loss of $5.3 million on the sale of underwater bonds, but made a profit of $5.5 million on the sale of Visa stock, slightly increasing its capital base.

“The execution of these transactions further strengthens Busy's liquidity position and balance sheet flexibility, while also strengthening its capital position,” the bank said in its January earnings call.

Unlike relatively few banks Banks that recently sold Visa stock did not take on large amounts of low-yield bonds when bond sales would have wiped out or nearly wiped out their capital. But in 2020 and 2021, when interest rates were low, bond payments weren't as high, so they bought some bonds.

Now that interest rates are much higher, banks can make more money just by leaving their cash with the Fed. Alternatively, you can use the cash from the sale to take out a loan, which can be a much better option.

“This gives us some options,” said Chris McGratty, an analyst at Keefe, Bruyette & Woods. “I don't want to overstate it. It doesn't solve all the sins of the balance sheet, but if done thoughtfully it can definitely have a net positive effect.”

BOK Financial, Tulsa, Oklahoma, announced it is monetizing its Visa stock. The $50 billion-asset bank faces sales restrictions but announced in March that it would take over Visa. Exchange offer where you can sell half of your shares.

The stock sale will offset the blow from the Bank of Korea's sale of low-yield and underwater bonds. In March, the company announced it had sold about $783 million in securities with an average yield of 2.45%. The company is currently reinvesting its cash in securities that pay a much higher dividend of 5.25%.

The bank absorbed a pre-tax loss of $45 million from the restructuring, but said it expects gains from Visa's exchange offer to “offset the realized losses.”

BOK Financial CEO Stacy Kymes said in a news release that the move's increased interest payments will improve the bank's profitability going forward. He also contrasted the strategy of banks that have held on to Visa stock for many years with the approach of banks that exited Visa stock long ago.

Kimes said that unlike the banks that sold Visa shares at “deeply discounted prices, we have chosen to hold on to the shares we received in 2008 and expect to receive their full value.” .

JPMorgan Chase, the country's largest bank, is also participating in the Visa exchange offer. The bank is not doing this as part of a bond restructuring transaction. Partly because they avoided buying too many bonds early in the pandemic.

But the move will still result in a one-time gain of $8 billion for the megabank, some of which will be donated to charitable foundations, the company said.

Most other large banks have already sold their shares in Visa, so only a few other banks are likely to benefit from the proposed exchange.

Among the big banks, custodian Northern Trust is likely to benefit the most because of its relatively large Visa holdings, Barclays analyst Jason Goldberg said. Two other companies that could enjoy smaller benefits are Pittsburgh-based PNC Financial Services Group and Salt Lake City-based Zions Bancorp., he said.

PNC Chief Financial Officer Robert Riley told analysts last month that the bank had about $1.6 billion in unrealized gains from its Visa stock. He said the bank plans to monetize half of its stake, but added in response to a question that PNC was still deciding how to use the proceeds.

“We will look at how we can utilize the excess capital, but we will wait until we have the capital to do so,” Riley said.