The value of Bank of America’s portfolio has plunged by $100 billion due to bonds whose yields have risen and prices have fallen, Financial Times reports.
The loss at the nation’s second-largest bank is more than double the cost to other U.S. lenders, data from the Federal Deposit Insurance Corp. shows.
By comparison, JPMorgan Chase and Wells Fargo, the nation’s biggest and third-largest banks, each had $40 billion in unrealized bond market losses at the end of the first quarter, whereas Citigroup, the fourth-largest bank, had paper losses of $25 billion.
BofA’s losses are one-fifth of the $515 billion in total unrealized losses in the securities portfolios of the 4,600 banks in the United States, FDIC data shows.
Banks found themselves with record cash during the pandemic and invested it in various ways, as they each take diverging bets on the direction of Federal Reserve interest rates. Between 2019 and 2022, the value of bank securities, primarily U.S. Treasuries and insured mortgage bonds, rose by 54% or $2 trillion—double their overall assets.
When Silicon Valley Bank announced in March it had lost $1.8 billion from selling part of its securities portfolio, the seemingly safe strategy backfired due to a bank run.
This is not the case at BofA, however, which has $370 billion in cash and is not facing a liquidity crunch. In fact, if interest rates were to fall, BofA’s bonds would regain value.
Additionally, the Federal Reserve’s annual stress tests released Wednesday showed stability at Bank of America.
However, investors are aware of the portfolio paper decline, and its stock, BAC, is down 15% year to date.
Ramifications are also weighing on BofA’s net interest margin, an important measurement of bank profits from loans and investments. JPMorgan’s annualized net interest margin at the end of the first quarter was 2.6%, edging out BofA’s 2.2%.
Further, the bonds BofA purchased during the pandemic generate significantly less income than bonds available now that the bank could purchase with customer deposits.
Bank of America Chief Executive Officer “Brian Moynihan has done a phenomenal job in handling the bank’s operations—but if you look at the bank’s balance sheet, it’s a mess,” says Dick Bove, chief strategist at Odeon Capital.
Jason Goldberg, a bank analyst at Barclays, adds, “When rates were low, they were making more money than rivals. Fast forward to today, and they are making less. I think the jury is still out” on BofA’s bond portfolio.
Scott Siefers comes down tougher on BofA’s securities holdings, calling its $100 billion in unrealized losses “a hot-button issue weighing on the stock.”
BofA has said it has no plans to sell the underwater bonds, and a spokesperson declined to comment on the situation to FT.
As far as a successor to Moynihan is concerned, one likely candidate is Alastair Borthwick. He joined Bank of America in 2010 and was promoted to CFO in 2021, after the bonds in question were purchased.
A person close to Moynihan told the Financial Times the $100 billion paper loss is not impacting his succession planning or timeline for departing from the bank.
However, Bove thinks it is a material factor.
“If the management of its balance sheet doesn’t impact succession planning, Bank of America’s board should be fired,” Bove says.