Bank of America's (BAC) Shocking Revelation on $99 Billion Bond Losses

Bank of America’s (BAC) Shocking Revelation on $99 Billion Bond Losses

Bank of America (BAC) has reported $99 billion of unrealized losses on a key portion of its bond portfolio, which is classified as held-to-maturity for accounting purposes. This news has caused concern among investors, especially after the collapse of Silicon Valley Bank in March. However, BofA’s Chief Financial Officer, Alastair Borthwick, has sought to reassure investors that the bank’s net interest income would rise in a higher-rate environment.

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

Investors have been focusing on large paper losses on bank bond portfolios in the wake of the Silicon Valley Bank collapse. BofA has the largest paper losses among U.S. banks on its bond portfolio, with rival JPMorgan Chase having $31 billion of losses on March 31. Banks do not have to reflect these unrealized losses in their capital ratios.

BofA CFO Alastair Borthwick has emphasized 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.

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

BofA’s unrealized losses on its bond portfolio have caused concern among investors, but the bank’s CFO has sought to reassure them that its net interest income will rise in a higher-rate environment. Nevertheless, the criticism from Warren Buffett highlights the importance of taking a long-term view when investing in securities and the value of considering alternative investment strategies.

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