Bank of America’s Huge Bond Losses Could Grow in the Second Quarter

Prices of fixed-income securities fall when interest rates rise, so the five percentage points of short-term rate increases the Federal Reserve has rolled out since March 2022 has slammed the value of bonds held by many financial institutions. But the loss on the Bank of America (ticker: BAC) portfolio is much higher than those at peers like

JPMorgan Chase

(JPM) and

Wells Fargo

(WFC).

That has weighed on Bank of America’s stock, which has the worst performance among its rivals this year. Bank of America stock, which was up 1.2% to $29.47 Monday, has fallen 11% this year, while shares of industry leader JPMorgan are up 13% to $152.69 in 2023, including a 2% gain Monday. In the past year, Bank of America stock has returned a negative 6% versus positive 39% for JPMorgan, Bloomberg data show. 

JPMorgan now has nearly double the market value of Bank of America as it continues to put more daylight between itself and its closest competitor. JP Morgan’s market value is about $440 billion, while Bank of America’s is $232 billion.

Based on JPMorgan’s second-quarter profit report released Friday, the Bank of America securities losses may have widened a little in the second quarter, reflecting a modest drop in mortgage-backed securities prices. The JPMorgan loss was about $33 billion on June 30, versus $30 billion on March 31.

Based on accounting rules, banks don’t have to reflect losses on securities classified as held-to-maturity in their capital positions. But the economic losses in the Bank of America portfolio are real and would account for a sizable chunk of the $182 billion of tangible equity it had on March 31 even adjusting for taxes. 

Separate bond portfolios held by Bank of America and other banks are classified as available for sale for accounting purposes. Any losses on those portfolios must be reflected in capital ratios, reducing banks’ equity.

The bank’s view is that the held-to-maturity portfolio, mostly agency mortgage securities with minimal credit risk, will ultimately mature and that the losses will melt away over time. Principal payments are running at about $10 billion per quarter. 

Evercore ISI Analyst Glenn Schorr asked on Bank of America’s first-quarter earnings conference call in April whether the lender “can just kind of ride it out and grind it down?” Alastair Borthwick, the bank’s chief financial officer responded: “Right now, that’s exactly what we’ve been doing. We’ve communicated that pretty clearly, and that’s what we’re continuing to do. It just keeps getting smaller and shorter.”

The size of the portfolio has shrunk from a peak of $683 billion in 2021, but it is still large. And the problem with mortgage securities is that effective maturities lengthen, increasing losses, as rising rates encourage homeowners to hold on to below-market loans. 

Barron’s has written about the securities losses, including in an article in March.

One potential problem for the bank is that the average yield on the held-to-maturity bond portfolio is 2.6%, about half the current market rate. With bank deposit costs rising, it could squeeze Bank of America’s net interest margins. The bank’s average deposit costs were about 1% in the first quarter. 

Bank of America’s second-quarter earnings are expected to have risen to 84 cents a share from 73 cents in the year-earlier period. Analysts are likely to be interested in the outlook for loan demand, credit quality, interest margins, investment banking trends, and retail brokerage when CEO Brian Moynihan leads a conference call to discuss the numbers on Tuesday.

But expect some analyst questions on the big bond losses as well.

Write to Andrew Bary at [email protected]