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Commerce Bancshares' (CBSH) Balance Sheet Revamp to Aid NII

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Commerce Bancshares (CBSH - Free Report) has announced a strategic repositioning of its balance sheet following the acceptance of a share exchange deal with Visa Inc. (V - Free Report) .

This January, in a Securities and Exchange Commission filing, Visa announced receipt of its shareholders' approval to amend its Certificate of Incorporation “that redenominated the Visa Class B common stock to Visa Class B-1 common stock.” The shareholders also authorized V to conduct one or more exchange offers. The company’s unique share structure – three share classes – was planned to ensure that banks that owned Visa before the IPO would still be on the hook to cover costs arising from its long-running litigation with major U.S. merchants.

Hence, CBSH tendered its 823,447 shares of Visa Class B-1 common stock in exchange for a combination of Visa Class B-2 common stock and Visa Class C common stock. This was accepted by Visa, and CBSH received 411,723 shares of Visa Class B-2 common stock and 163,404 shares of Visa Class C common stock.

Commerce Bancshares marked its Visa Class C common stock to fair value and recognized a gain of $175.5 million in the ongoing quarter.

Similarly, earlier this week, JPMorgan (JPM - Free Report) announced recognizing accounting gains of almost $8 billion in the second quarter of 2024 as part of a share exchange deal with Visa. JPM tendered its 37.2 million shares of Visa Class B-1 common stock in exchange for a combination of Visa Class B-2 common stock and Visa Class C common stock.

Following the completion of this exchange program, Commerce Bancshares approved a strategic balance sheet repositioning plan for part of its available-for-sale debt securities portfolio. Under this, the company intends to sell securities with an amortized cost of almost $1.0 billion. This is expected to result in a loss of approximately $165 million in the second quarter of 2024.

CBSH anticipates reinvesting the proceeds mostly into investment securities, yielding roughly 4.6%, which is way above the 2% yield that securities to be sold would have offered. The company expects the repositioning to drive net interest income (NII) higher, reduce interest rate risk to lower rates and enhance the quality of the company's pledgeable investment securities.

In the first quarter of 2024, the company reported a 1% year-over-year decline in NII mainly because of lower interest income of investment securities and securities purchased under agreements to resell.

Therefore, the balance sheet repositioning effort will help CBSH expand its net interest margin and support top-line growth.

Currently, shares of this Zacks Rank #2 (Buy) company have rallied 8.9% in the past three months, compared with 6.3% growth for the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..

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Since early last year, banks’ NII has been under pressure as the Federal Reserve significantly raised the interest rates to curb high inflation. Hence, several lenders are resorting to repositioning their balance sheet. Like CBSH, Truist Financial (TFC - Free Report) recently announced a balance sheet revamp and recognized an after-tax loss of $5.1 billion in the ongoing quarter.

TFC noted that these efforts will add $160 million to NII in the current quarter and $710 million (including the second quarter) to 2024 NII. The company has, thus, updated total revenue guidance for the second quarter and full-year 2024.

The company now anticipates total revenues in the second quarter to rise 1% sequentially against the prior guidance of a decline of 2%. For 2024, Truist now projects total revenues to decrease 0.5-1.5%. Earlier, the company had expected revenue decline in the range of 4-5%.

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