The more exotic the securities, the better?
New accounting rules announced Thursday may benefit Citigroup, JPMorgan Chase, Bank of America Corp., Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp., analysts said.
Smaller players, such as Zions Bancorp. in Salt Lake City, M&T Bank Corp. in Buffalo and Popular in Puerto Rico, will also be on analysts' radar screens.
The new rules "should have a very positive effect on their capital balances, that's for sure," said Robert Willens, head of the tax and accounting advisory firm Robert Willens LLC in New York.
Companies will "get to write up the carrying amount of their debt securities and in some cases equity securities, and that increase in value is credited to 'other comprehensive income' and eventually to shareholder equity."
What the banks all have in common: relatively high exposures to exotic, difficult-to-value assets that could be valued higher under the new rules announced by the Financial Accounting Standards Board (FASB).
By adjusting the rules on mark-to-market accounting and on accounting for other-than-temporary impairment charges, the FASB has given companies more flexibility to value assets when prices may not be accurately reflected in distressed markets.
Analysts said that taken together, the new rules are nearly certain to make banks appear healthier, to the extent banks actually act on them.
Willens, for one, predicted that capital balances at some banking companies will rise 10% or more as the new accounting standards are adopted.
The new FASB standards go into effect in the second quarter, but companies may apply them to first-quarter financials as long as they agree to use both sets of changes on mark-to-market valuations and on OTTI accounting.
Banking companies including PNC Financial Services Group and Citigroup declined to say when they would start using the new standards.
Christopher Whalen, managing director at Lord, Whalen's Institutional Risk Analytics, said the changes should have little impact on banks that are cautious in their accounting practices.
"The prudent banker isn't going to write [the asset valuations] up," Whalen said, noting that "they have already taken the pain" of writedowns.
"If you write them up now, you may have to write them down again later in the year because of the economics, and not the accounting," he said.
Speaking on CNBC, Kenneth Lewis, Bank of America's chairman and chief executive, said on Thursday that the fair-value changes might add "a penny or two" to earnings per share. He disputed claims by some that it could boost earnings per share at banks by up to 20%.
Lewis also said that about 29% of his $2.5 trillion-asset company's assets "are actually marked to market, and marked pretty severely."
A spokesman for Citigroup said the mark-to-market changes would have no impact on its asset valuations, but he declined to comment on the potential effect of the OTTI changes.
Banks that recently made purchase-accounting acquisitions, such as the transactions that merged Wachovia into Wells and National City into PNC, could be among the big beneficiaries of the rule changes.
"They marked stuff pretty conservatively, so they should see a lift," said Mark Fitzgibbon, head of research at Sandler O'Neill & Partners.
Frederick Cannon, chief equity strategist at KBW's Keefe, Bruyette & Woods, said the FASB changes could allow more banking companies to transfer Level 2 assets, which are marked to market when a bid exists, to their bucket for Level 3 assets, which are marked according to a model.
Structured, nonagency mortgage products would likely benefit most from the new accounting standards, he said. "But the market at the end of the day still has to figure out the value of these assets."
Analysts are not sure, however, that the improved capital will result in higher bank stock prices.
"At the end of the day, the investment community is looking at all this with big grains of salt," said Anthony Davis, an analyst at Stifel, Nicolaus & Co.
The Investors' Working Group, a panel of high-profile financial experts including former Securities and Exchange Commission Chairmen William H. Donaldson and Arthur Levitt Jr., said that the new rules reduce transparency and that the rushed process will lead to "an increase in capital costs, erosion of investor confidence and ultimately a disruption of markets."FASB Chairman Robert H. Herz defended the board's compressed time frame for changing the rules, saying a shortened public comment period and other expedited procedures never compromised the board in the performance of its duties.