Bank of America’s Debt Securities Losses Widened in Q2

According to Bank of America’s supplemental data disclosed in conjunction with its earnings release on Tuesday morning, the loss on the bank’s massive portfolio of debt securities increased by nearly $7 billion to $105.8 billion in the second quarter.

“Held-to-Maturity” Debt Portfolio

At the end of the quarter, the bank’s “held-to-maturity” debt portfolio, where the losses are located, totaled $614 billion. This marked a decrease from nearly $625 billion at the end of the previous quarter.

Impact on Interest Margins

Mostly composed of agency mortgage securities, this portfolio may be affecting the bank’s interest margins as deposit costs continue to rise.

Below Market Yields

Bank of America’s total debt portfolio carries an average yield of about 2.5%, which is significantly lower than market rates. Currently, mortgage securities yield over 5%. At the end of the second quarter, the bank’s mortgage securities portfolio, valued at approximately $485 billion, was priced at about 83 cents on the dollar.

Narrowed Net Interest Yield

In the second quarter, the bank’s net interest yield decreased to 2.06% from 2.2% in the previous quarter. Additionally, net interest income dropped by $300 million sequentially to $14.3 billion. The bank attributed this decline to “higher deposit costs.”

Rising Deposit Costs

Bank of America experienced a notable increase in deposit costs during the second quarter, with rates rising from 1.38% to 1.82%. This trend reflects the pressure faced by banks, including Bank of America, to boost deposit rates as money-market funds and Treasury bills yield around 5%.

Bank of America Reports Strong Earnings Despite Bond Losses

Bank of America has released its second-quarter earnings, showcasing impressive growth in earnings per share. The bank reported a 20% rise in earnings per share to 88 cents, exceeding expectations of 84 cents. However, the stock performance has been lackluster compared to its peers, with a 1.2% decrease to $29.06 in premarket trading. This downward trend can be attributed to bond losses, which have impacted the overall performance of the stock. Bank of America’s stock has experienced an 11% decline year-to-date, whereas industry leader JPMorgan Chase has seen a 14% increase.

Despite these challenges, Bank of America’s CEO, Brian Moynihan, remains optimistic about the company’s performance. “We delivered one of the strongest quarters and first half net income periods in the company’s history,” said Moynihan in a statement.

During the earnings conference call, both Moynihan and Alastair Borthwick, the bank’s chief financial officer, may address concerns regarding the bond losses. However, it is important to note that these losses in the held-to-maturity portfolio do not impact the bank’s capital ratios directly. Although the economic losses are real, Bank of America believes that the held-to-maturity portfolio, consisting mainly of agency mortgage securities with minimal credit risk, will mature over time and subsequently diminish these losses. In fact, principal payments have been consistent at around $10 billion per quarter, leading to a sequential decrease of approximately $10 billion in the size of the held-to-maturity portfolio during the second quarter.

Bank of America’s commitment to managing these bond losses demonstrates their proactive approach to maintaining strong financial stability and capitalization, ensuring long-term success for both the bank and its shareholders.