Why some banks have decided now is the time to sell their Visa shares

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Banks are again tapping their Visa piggy banks, in some cases looking to plug holes from low-yielding investments they likely regret.

Selling shares in the payments giant, whose value has skyrocketed 1,600% since its 2008 initial public offering, is coming in handy for certain banks that are restructuring their underwater bond portfolios.

Those banks saw the value of their bonds tank when interest rates rose, causing losses that were previously "unrealized" but become very much real once the bonds are sold. The decision to get rid of the bonds can be painful because it lowers the banks' capital levels, giving them a smaller cushion to handle potential economic turmoil.

But if banks can offset those losses with a gain elsewhere — for instance, by selling their Visa shares — they can wiggle out of their ill-timed bond investments without suffering much damage. And, free of those low-yielding bonds, they can reinvest the money in better ways.

"Monetizing them when you need to, I think, makes sense," Brett Rabatin, an analyst at Hovde Group, said of banks' Visa shares.

The sales are one example of banks coming up with "creative ways to fill the hole created by selling underwater securities," said Paul Davis, a consultant and founder of The Bank Slate. Selling banks' highly desired insurance businesses, as Truist Financial did this year, is another option.

One downside for banks of offloading their Visa shares is that while those one-time actions will help them this cycle, they won't be available in the future.

"If you're taking out your hammer, and you're breaking into the piggy bank to weather this circumstance, how well are you equipped to handle the next one?" Davis said. "At the end of the day, I think it really comes down to being really thoughtful about the big picture and the long term."

Not every bank can or will take the option. Many of them sold their Visa shares long ago — moves that helped them navigate economic troubles roughly a decade ago. Others may still be hanging onto their shares, not seeing the need to follow their competitors' bond-restructuring trades.

Some banks have faced restrictions on the sales as a result of provisions that kept them on the hook for Visa-related lawsuits. As those lawsuits come closer to an end, Visa is easing those restrictions, opening up the possibility of more sales soon.

A Visa spokesperson declined to comment on banks' sales.

In recent months, banks that have sold shares in the payments network include Seacoast Banking of Florida; Bank of Marin Bancorp in California; First Hawaiian in Honolulu; and Arrow Financial in Glens Falls, New York.

The details vary, but the sales help the banks restructure their bond portfolios without taking a large capital hit. The moves also help the banks make more money, since they can replace the low-paying bonds that are weighing on their earnings with higher-paying ones.

First Busey in Champaign, Illinois sold underwater securities that were previously yielding 1.56%. It's parked its cash at the Federal Reserve, which pays banks a 5.4% rate for their reserve balances. While the parent company of Busey Bank lost $5.3 million from selling its underwater bonds, it also gained $5.5 million from selling its Visa shares, adding to its capital base slightly.

"Execution of these transactions further bolsters Busey's liquidity position and balance sheet flexibility, while also strengthening its capital position," the bank said in an earnings release in January.

Unlike the relatively small number of banks where bond sales would wipe out or nearly eliminate their capital, those banks that have recently sold their Visa shares did not saddle themselves with too many low-yielding bonds. But they did buy some bonds during 2020 and 2021, when interest rates were low, and bonds didn't pay all that much.

Now that interest rates are far higher, banks can make more money by simply sticking their cash at the Fed. Or they can use the cash they get from the sales to make loans, which can be a far more lucrative option.

"It provides a little bit of optionality," said Chris McGratty, an analyst at Keefe, Bruyette & Woods. "Now, I don't want to overstate it. It's not going to cure all the sins of the balance sheet if there are some, but it can certainly be a net accretive exercise if thoughtfully done."

BOK Financial in Tulsa, Oklahoma, has said that it's monetizing its Visa shares. The $50 billion-asset bank has faced restrictions on the sales but said in March that it would take up Visa on an exchange offer that will let it sell half of its holdings.

The stock sales will offset the blow from BOK's sale of low-yielding and underwater bonds. In March, the company said that it sold some $783 million in securities that had an average yield of 2.45%. It's now reinvesting cash into securities that pay much more — 5.25%.

The bank absorbed a $45 million pretax loss due to the restructuring, but it said that it expects to "offset the realized losses" with the gains from Visa's exchange offer.

In a news release, BOK Financial CEO Stacy Kymes said the higher interest payments from its move will improve the bank's profitability going forward. He also contrasted his bank's strategy of hanging onto its Visa shares for many years with the approach taken by banks that got rid of them long ago.

Unlike banks that sold their Visa shares "at a considerable discount, we chose to retain the shares we received in 2008 and expect to receive full value,"  Kymes said.

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JPMorgan Chase, the country's biggest bank, is also participating in the Visa exchange offer. The bank is not doing so as part of a bond restructuring trade — partly because it avoided buying too many bonds earlier in the pandemic.

But the move will nonetheless result in an $8 billion one-time gain for the megabank, part of which it said will go to its charitable foundation.

Most other large banks have already sold off their Visa shares, so only a few others are expected to benefit from the exchange offer.

Among big banks, the custody bank Northern Trust will likely see the biggest benefit due to its relatively larger Visa holdings, according to Barclays analyst Jason Goldberg. Two others that should enjoy a smaller benefit are Pittsburgh-based PNC Financial Services Group and Salt Lake City-based Zions Bancorporation, he said.

Robert Reilly, PNC's chief financial officer, told analysts last month that the bank is sitting on some $1.6 billion in unrealized gains from its Visa shares. The bank plans to monetize half of its shares, he said, but added in response to a question that PNC was still deciding how to use the proceeds.

"We'll look at how we apply everything in terms of our excess capital, but we'll wait until we get the capital to do that," Reilly said.