Bank of America posts $100 billion paper loss after big bet in bond market

Bank of America is bearing the cost of a decision three years ago to pump the bulk of the $670 billion in pandemic-era deposit inflows into debt markets, at a time when bonds were at historically high prices and low yields were traded.

According to the Federal Deposit Insurance Corporation, BofA, the second largest US bank by assets, recorded more than $100 billion in paper losses at the end of the first quarter. The total far exceeds the unrealized bond market losses reported by its biggest peers.

The differing results reflect strategies pursued at the start of the Covid-19 pandemic, when banks absorbed a flood of deposits from savers. BofA invested more money in bonds, while others invested a larger proportion in cash.

As yields have risen and bond prices have fallen, the value of the BofA portfolio has fallen. In contrast, JPMorgan Chase and Wells Fargo — the country’s first and third-largest banks, respectively — each posted about $40 billion in unrealized bond market losses, while fourth-largest Citigroup’s paper losses were $25 billion.

Losses at BofA accounted for one-fifth of the total unrealized losses in the securities portfolios of the country’s nearly 4,600 banks of $515 billion at the end of the first quarter, FDIC data showed.

“[BofA chief executive] “Brian Moynihan has done a phenomenal job running the bank’s businesses,” said Dick Bove, a veteran banking analyst and chief strategist at boutique brokerage Odeon Capital. “But if you look at the bank’s balance sheet, it’s a mess.”

BofA has said it has no plans to sell the underwater bonds to avoid crystallized losses, which are currently only on paper. The bank’s portfolio consists of highly rated government-backed securities that are likely to be repaid at some point as the underlying loans mature.

But holding onto relatively low-yielding investments, many of which are backed by 30-year home loans, at a time when newly purchased bonds are yielding significantly more, could limit the income BofA can generate from its customer deposits.

“I think the jury is still out,” said Jason Goldberg, a banking analyst at Barclays, of BofA’s bond portfolio. “When interest rates were low, they made more money than their competitors. If we look at today, they will earn less.”

Years of low interest rates, increased regulation, and subdued economic growth have prompted banks of all sizes to move more deposits into bonds and other securities, or increase lending by seeking less creditworthy borrowers. According to FDIC data, the total value of securities, mostly government bonds and insured mortgage bonds, at all banks grew 54 percent, or $2 trillion, from late 2019 to mid-2022, roughly twice the rate of their total assets.

Silicon Valley Bank, which both increased its securities holdings and made loans to loss-making startups, is emblematic of how the strategy backfired. In March there was a run on SVB, prompted by the announcement that it had lost $1.8 billion on the sale of part of its securities portfolio.

BofA has $370 billion in cash and cash equivalents and is not facing an SVB-like liquidity crisis. In fact, BofA and other large banks have received inflows of deposits from customers of regional lenders. Most home loans are repaid well in advance of their 30-year term, and if interest rates were to fall again, BofA’s bond holdings would appreciate again.

BofA, like other peers, also performed well in the Fed’s annual stress tests, the results of which were released on Wednesday.

Still, investors are feeling the effects of BofA’s wrong decisions in the securities portfolio, analysts say. BofA’s shares are down 15 percent this year, making it the worst performer of any major peer. JPMorgan shares are up 3 percent.

The impact is also weighing on BofA’s net interest margin, a key performance indicator that measures how much profit a bank is making on its loans and investments.

For years, JPMorgan and BofA have been level on this scale. But over the past year, JPMorgan has been able to come out on top, and in the first quarter its annual net interest margin was 2.6 percent versus 2.2 percent at BofA.

Line chart of annualized net interest margin (%) showing lag

The unrealized losses are “a touchy subject,” said Scott Siefers, banking analyst at Piper Sandler, adding that they were “one of the things that weighed on the stock.”

A BofA spokesman declined to comment.

Alastair Borthwick, chief financial officer of BofA, answered half a dozen questions about the securities portfolio and potential losses on the bank’s recent conference call. Borthwick said BofA is in the process of unwinding its securities investments, which declined to $760 billion at the end of the first quarter from a peak of $940 billion in late 2021.

“In fact, this quarter we rolled some of that into cash just because it’s easier,” Borthwick said, citing bonds that are accounted for in a way that makes them easier to sell. “It’s easier for everyone to understand.”

Borthwick was promoted to CFO in late 2021 and has since been recognized as the executive most likely to succeed Moynihan, who has been CEO of BofA since 2010. As CFO, Borthwick is directly responsible for managing BofA’s securities holdings and overall balance sheet.

The move to securities was initiated before Borthwick took on the role. At that point, the portfolio’s unrealized losses were less than $1 billion.

A person familiar with Moynihan’s mindset said the stock losses hadn’t impacted succession planning or changed the timetable for when he could leave the bank. Moynihan had previously stated that he would like to stay on as CEO until the end of this decade.

But Odeon Capital’s Bove believes the way the bank manages its securities portfolio will have an impact on who takes the top job — and when. “If managing their balance sheet doesn’t affect succession planning, the board of directors of Bank of America should be fired,” he said.

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