Some Big Banks Showing Pension Shortfalls as Assets

by: Research Recap

Moody’s says that in fiscal 2009, the defined benefit plans of 10 of the banks it examined were in a deficit position (meaning that the present value of the plans’ obligations exceeded the value of the related plan assets); and the remaining 4 were in a surplus position – JPMorgan Chase (NYSE:JPM), ING (NYSE:ING), Banco Comercial Portugues and Banco Espirito Santo. In fiscal 2008, 11 banks’ plans were in a deficit position, and 3 had a surplus – Banco Comercial Portugues, National Australia Bank and Mizuho Financial Group (NYSE:MFG).

The 4 U.S. banks examined (Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JPMorgan Chase and Citigroup (NYSE:C)), together with one European bank (Royal Bank of Scotland (NYSE:RBS)) and National Australia Bank, each fully-recognized the funded status of their plans (i.e. the difference between the present value of the plan’s obligations and the value of the assets in the plan trust) on their respective balance sheets.

However, due to different accounting rules, some banks reported a net asset on their respective balance sheets for their plans in fiscal 2009, even though the plans were in a deficit position: the funded status of Bank of Montreal’s (NYSE:BMO) plans was a deficit of CAD0.8 billion, but it reported a net asset of CAD0.6 billion; the funded status of UBS’s (NYSE:UBS) plans was a deficit of CHF1.9 billion, whereas it reported them as a net asset of CHF2.6 billion; and the funded status of Mizuho Financial Group’s plans was a deficit of JPY158 billion, whereas it reported a net asset of JPY523 billion.

We believe that this is incongruous reporting and does not reflect the plans’ true economic condition.

The results of the rating agency’s review highlights why it is proposing to introduce a global standard adjustment to banks’ financial statements to ensure increased comparability amongst banks with these plans, as well as applying “principles that Moody’s believes better reflect the banks’ true economic conditions.”

Moody’s said implementation of these proposed adjustments would not have an immediate impact on ratings. “However, via formalizing our methodology for interpreting these plans, their impact on banks’ capital and financial results would be more transparent than in the past; and it will enable us to more easily monitor and assess the credit risk associated with them.”