Bank of America Reassures Investors About Unrealized Bond Losses

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Bank of America

sought to reassure investors about some $99 billion of unrealized losses on a key portion of its bond portfolio as its chief financial officer emphasized that the bank’s net interest income would rise in a higher-rate environment.

The comments by Alastair Borthwick came on the company’s earnings conference call Tuesday morning.

Bank of America reported its first-quarter results Tuesday morning. It included in supplemental financial data the March 31 paper losses on its bond portfolio, which is classified as held-to-maturity for accounting purposes. 

The losses totaled $99 billion, narrower than the nearly $109 billion on Dec. 31, reflecting a rally in the bond market during the first quarter. The portfolio, with a cost basis of $624 billion, consists largely of agency mortgage securities.

Investors have been focused on large paper losses on bank bond portfolios in the wake of the collapse of Silicon Valley Bank in March. Bank of America (Ticker BAC) has by far the largest paper losses among U.S. banks on its bond portfolio. Rival

JPMorgan Chase

(JPM) had $31 billion of losses on March 31. Banks don’t have to reflect these unrealized losses in their capital ratios.

Bank of America shares were little changed Tuesday in the wake of the earnings report, rising 0.6% to $30.56. Its earnings of 94 cents a share topped estimates of 81 cents.

On the earnings conference call, analyst Mike Mayo asked: “You’ve seen the front page of many papers highlighting your unrealized securities losses, you highlight the yield on your securities at 2.6%, you highlighted your held-to-maturity portfolio at eight years (in weighted average life),” Mayo said. He added that might suggest that the bank assets and liabilities weren’t well matched.

Bank of America chief financial officer Alastair Borthwick responded by noting that the value of the bank’s low-cost deposit franchise becomes more valuable in a higher-rate environment when bond prices are falling.

 “One of the reasons that we spend as much time laying out the deposit franchise is because in a rising rate environment, you’d expect obviously that bond markets are going to turn negative. And, at the same time, you and we have been expecting, as rates go up, the NII (net interest income) would rise, because the deposits are so much more valuable in that environment,” Borthwick said.

Analyst Glenn Schorr asked about the bank’s securities losses, saying “at this point, given the stability, your deposit base, loan growth, capital growth, do you feel like you can just kind of ride it out and grind it down?

Borthwick responded: “Correct. 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. “ Shorter refers to a steadily shorter average maturity.

In a CNBC interview last week,

Berkshire Hathaway

CEO Warren Buffett was critical of banks for investing in mortgage securities at historically low yields, calling them “a very dumb holding for banks.”

The problem for mortgage securities holders is that effective maturities lengthen when rates rise, the opposite of what they would want. 

Unlike banks, Berkshire chose to invest its cash of over $100 billion largely in short-term U.S. Treasury bills. It accepted rates near zero in 2020 and 2021 but now is getting 5% on its holdings. Bank of America arguably should have taken more of a Berkshire-type approach because it now could be earning 5% on its bond portfolio, twice the current rate.

Berkshire is Bank of America’s largest investor with a roughly 13% stake—some one billion shares.

Write to Andrew Bary at [email protected]