Bank of America nurses $100bn paper loss after big bet in bond market

Financial institution of America is bearing the price of selections made three years in the past to pump the vast majority of $670bn in pandemic-era deposit inflows into debt markets at a time when bonds traded at traditionally excessive costs and low yields.

The strikes left BofA, the second-largest US financial institution by belongings, with greater than $100bn in paper losses on the finish of the primary quarter, in keeping with knowledge from the Federal Deposit Insurance coverage Company. The sum far exceeds unrealised bond market losses reported by its largest friends.

The differing outcomes mirror methods undertaken early within the Covid-19 pandemic, when banks absorbed a flood of deposits from savers. BofA put extra money into bonds, whereas others parked a higher share in money.

Now that yields have risen and bond costs have fallen, the worth of BofA’s portfolio has plunged. Against this, JPMorgan Chase and Wells Fargo — the nation’s first and third-largest banks, respectively — every had about $40bn in unrealised bond market losses, whereas fourth-largest Citigroup’s paper losses have been $25bn.

The losses at BofA accounted for a fifth of the $515bn in complete unrealised losses within the securities portfolios among the many nation’s practically 4,600 banks on the finish of the primary quarter, FDIC knowledge confirmed.

“[BofA chief executive] Brian Moynihan has executed an exceptional job in dealing with the financial institution’s operations,” mentioned Dick Bove, a veteran financial institution analyst who’s the chief strategist at boutique dealer Odeon Capital. “However for those who have a look at the financial institution’s stability sheet, it’s a multitude.”

BofA has mentioned it has no plans to promote the underwater bonds, avoiding crystallised losses that for now exist solely on paper. The financial institution’s portfolio consists of extremely rated government-backed securities which might be prone to finally be paid again when the underlying loans mature.

However holding on to the comparatively low-yielding investments, lots of that are backed by 30-year house loans, at a time when newly bought bonds yield considerably extra, may restrict the revenue that BofA can generate from its buyer deposits.

“I believe the jury remains to be out,” mentioned Jason Goldberg, a financial institution analyst at Barclays, of BofA’s bond portfolio. “When charges have been low they have been making extra money then rivals. Quick-forward to as we speak and they’re making much less.”

Years of low rates of interest, elevated regulation and tepid financial development prompted banks of all sizes to place extra deposits into bonds and different securities or increase lending by pursuing much less creditworthy debtors. From the tip of 2019 to mid-2022, the overall worth of securities, principally Treasuries and insured mortgage bonds, in any respect banks rose by 54 per cent, or $2tn, and about twice as quick as their total belongings, in keeping with FDIC knowledge.

Silicon Valley Financial institution, which each boosted securities holdings and lent to money-losing start-ups, is emblematic of how the technique has backfired. A financial institution run torpedoed SVB in March, sparked by an announcement that it had misplaced $1.8bn in promoting a part of its securities portfolio.

BofA has $370bn in money and isn’t going through any SVB-like liquidity crunch. The truth is, BofA and different huge banks have obtained inflows of deposits from prospects of regional lenders. Most house loans are paid off far sooner than their 30-year time period, and if rates of interest have been to fall once more, then BofA’s bond holdings would regain worth.

BofA, like different friends, additionally fared effectively within the Fed’s annual stress assessments, the outcomes of which have been launched on Wednesday.

Nonetheless, the results of BofA’s securities portfolio mis-steps are being felt by traders, analysts say. Shares of BofA have fallen 15 per cent this yr, making it the worst performer of any of its giant rivals. JPMorgan shares have gained 3 per cent.

The affect can be weighing on BofA’s internet curiosity margin, an vital gauge of efficiency that measures how a lot revenue a financial institution makes on its loans and investments.

For years, JPMorgan and BofA have been neck and neck on this yardstick. However prior to now yr, JPMorgan pulled forward and within the first quarter its annualised internet curiosity margin was 2.6 per cent versus 2.2 per cent at BofA.

The unrealised losses are “a hot-button challenge”, mentioned Scott Siefers, a banking analyst at Piper Sandler, including that they’ve “been one of many issues weighing on the inventory”. 

A BofA spokesperson declined to remark.

Alastair Borthwick, BofA’s chief monetary officer, fielded a half dozen questions in regards to the securities portfolio and the potential losses on the financial institution’s most up-to-date earnings name. Borthwick mentioned BofA was within the strategy of winding down its securities investments, which had declined to $760bn on the finish of the primary quarter from a peak of $940bn in late 2021.

“Truly, this quarter, we ended up changing a few of them into money simply because it’s easier,” mentioned Borthwick, referring to bonds which might be accounted for in a method that makes them simpler to promote. “It’s easier for everybody to grasp.”

Borthwick was promoted to CFO in late 2021 and has since been seen as the manager most probably to succeed Moynihan, who has been BofA’s chief government since 2010. As CFO, Borthwick is straight liable for managing BofA’s securities holdings and total stability sheet.

The transfer into securities was initiated earlier than Borthwick took on the function. On the time, the unrealised losses on the portfolio have been lower than $1bn.

An individual conversant in Moynihan’s considering mentioned the securities losses had not affected succession planning or modified the timeline of when he may go away the financial institution. Moynihan has beforehand mentioned he wish to stay as CEO till the tip of this decade.

However Odeon Capital’s Bove is satisfied that the best way the financial institution has dealt with its securities portfolio will affect who takes excessive job — and when. “If the administration of its stability sheet doesn’t affect succession planning, Financial institution of America’s board needs to be fired,” he mentioned.