Bank of America, America’s second largest investment bank reported better than expected second earnings Tuesday. Three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) reported last Friday. Bank of America reported a profit of 90 cents per share in the quarter, beating analysts’ average expectations of 82 cents per share, according to IBES data from LSEG. Net interest income rose 4% to $14.4 billion (FTE basis). BAC reported unrealized losses of $131.6 billion on securities held until maturity in the third quarter, growing from nearly $ 106 billion in paper losses in the second quarter. BAC had about $603 billion in held-to-maturity securities, it said in a filing on Tuesday, shrinking from $614 billion in the second quarter.
Bank of America Corporation NYSE: BAC Reported Earnings Before Open Tuesday
Bank of America Q3 2023 Earnings
Q3 2023 earnings released at 6:45 a.m. ET; conference call at 9:30 a.m. ET
- EPS of $0.88, exceeding the average analyst estimate of $0.83, fell from $0.94 in Q1 2023 and rose from $0.73 in Q2 2022.
- Investment banking and trading units outperformed. Total investment banking fees rose 2% to $1.2 billion, bucking an industry-wide slump.
- Sales and trading revenue was up 8% to $4.4 billion in the third quarter to its highest in more than a decade.
- BofA net interest income (NII) rose 4% to $14.4 billion.
- Revenue at BofA’s consumer banking unit rose 6% to $10.5 billion.
- Spending on debit and credit cards also rose 3% in the quarter
- BofA said it had unrealized losses of $131.6 billion on securities held until maturity in the third quarter, growing from nearly $106 billion in paper losses in the second quarter.
“We added clients and accounts across all lines of business,” CEO Brian Moynihan said in a statement. “We did this in a healthy but slowing economy that saw U.S. consumer spending still ahead of last year but continuing to slow.”
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Higher Interest Rates Increase Revenue …. But at a Cost
Bank of America is one of the main beneficiaries of the Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing them to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
In the second quarter the bank cited “higher deposit costs” as a factor behind the lower interest income. BAC’s net interest yield narrowed to 2.06% in the second quarter from 2.2% in the first quarter, while net interest income was down $300 million sequentially to $14.3 billion in the second quarter.
The bank’s deposit costs rose sharply to 1.82% in the second quarter from 1.38% in the first quarter, indicating that Bank of America, like other banks, is feeling pressure to boost deposit rates with money-market funds and Treasury bills yielding about 5%.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices.
Security Portfolio Losses
The loss on Bank of America’s huge portfolio of debt securities widened to $131.6 billion on securities held until maturity in the third quarter, growing from nearly $106 billion in paper losses in the second quarter. The lender had about $603 billion in held-to-maturity securities, it said in a filing on Tuesday, shrinking from $614 billion in the second quarter.
Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at a sharp loss, precipitating its collapse and fueling the worst industry turmoil since the 2008 financial crisis.
The Bank of America portfolio consists mostly of agency mortgage securities is weighing on the bank’s interest margins as deposit costs continue to increase. The bank’s total debt portfolio with an average yield of about 2.5% is considerably below market, with current yields on mortgage securities exceeding 5%. The bank’s mortgage securities portfolio totaling around $485 billion was valued at about 83 cents on the dollar at the end of the second quarter.
The numbers come from supplemental data disclosed in conjunction with the bank’s earnings release Tuesday morning.
Analysts say it is highly unlikely that Bank of America would sell the securities at a loss.
“All of these are unrealized losses are on government- guaranteed securities,” Bank of America’s chief financial officer, Alastair Borthwick, told reporters on conference call discussing third-quarter earnings. “Because we’re holding them to maturity, we will anticipate that we’ll have zero losses over time.”
“Held-to-maturity” debt portfolio losses.
JPMorgan Chase (JPM) had unrealized losses of $40 billion in its HTM portfolio in the third quarter. Citigroup (C) did not disclose paper losses on its portfolio for the third quarter. They stood at $24 billion at the end of the second quarter.
Outlook
BofA CFO Alastair Borthwick said on a media call that headcount at the bank was expected to be flat from third-quarter levels going forward.
“What we’ll be trying to do from here is maintain discipline and we maybe flattish from here on. We’ll see how that develops over the course of the next year,” Borthwick said.
Bank of America Last Quarter Earnings
Source: BAC, TC, WSJ
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