DVA's Bring the Bank Earnings Noise
Bank of America and Citigroup seem to do a better job highlighting when DVAs hurt earnings in recent quarterly earnings releases than when they're a benefit. Meanwhile, when reporting its full year profit in 2008, Morgan Stanley was happy to note a $5 billion DVA gain on page six of its earnings release. When the DVA turned to a $5.5 billion loss in 2009, Morgan Stanley highlighted the impact in bolded bullet points at the top of the first page of its earnings release.
In 2011 and 2012 earnings releases, Morgan Stanley has prominently featured both DVA gains and losses. "This firm has continually, and on as many cases as possible emphasized DVA and split it out for investors," says Mark Lake, a Morgan Stanley spokesperson.
In Morgan Stanley's most recent quarter, analysts and investors expected a $2 billion DVA loss that turned the bank's overall net income to a loss, but they didn't focus on it. Instead, analysts excluded the treatment in the firm's far stronger-than-expected earnings, and for its peers. Headlines on the Morgan Stanley's earnings varied with some reports focusing on the firm's loss, while others focused on its earnings beat and ex-DVA profit. It's a signal that though insiders, regulators and even credit rating agencies exclude DVA, there's still plenty of confusion.
Dmitry Pugachevsky a director of research at risk management specialist Quantifi, argues that, in effect, banks now have two separate DVA and non-DVA earnings. Pugachevsky, who formerly headed JPMorgan's counterparty credit modeling unit, sees more of a use for credit valuation adjustments, another part of fair value bank accounting that calculates expected losses stemming from the deterioration of a firm's trading counterparts.
Banks opted to disclose those adjustments, or CVAs, in a move to show how they manage their trading books - a parallel to how they reserve for losses on ordinary loans. CVAs accounted for nearly two-thirds of investment banking losses during the financial crisis, estimates Pugachevsky.