Though Bank of America reported mostly positive results for the third quarter, a large pool of unrealized bond losses still casts a pall over the company's outlook.
The bank's unrealized losses on held-to-maturity securities, which increase as interest rates climb, rose by 13% from the same period last year to $131.6 billion.
Investors seemed to focus on more favorable aspects of BofA's earnings report, as the company's stock price closed up 2.3% at $27.62. The nation's second-largest bank by asset size reported $14.4 billion of net interest income, which was up 4.5% from the third quarter of 2022.
But some analysts said that the growth in BofA's net interest income could be short-lived as unrealized losses on its bond portfolio continue to rise.
"A good headline beat is nice and can help the stock near-term, but there are certain investor concerns that persist," Scott Siefers, an analyst at Piper Sandler, said in an interview.
Richard Bove, an analyst at Odeon Capital Group, offered a harsher critique of the bank's management of interest rate risk, arguing that executives did not "properly hedge" lower rates during the pandemic.
"They've locked themselves into very, very low yields for who knows how many years," Bove said. "They have basically put themselves on a plane to not be able to earn as much money as it appears."
Investors became
On a call with analysts on Tuesday, Bank of America Chief Financial Officer Alastair Borthwick said the company's available-for-sale securities rose by $34 billion during the third quarter.
BofA reduced its cash during the quarter by investing in short-term Treasury notes at "essentially the same rate as cash," Borthwick told analysts. The Charlotte-based bank also reported an $11 billion decline in held-to-maturity securities that matured or were paid down.
The bank's earnings report included numerous upbeat metrics. Total revenue of $25.5 billion was up 3% from last year's third quarter, while net income of $7.8 billion was 10% higher than the same period a year ago.
Similar to the trends at other large U.S. banks, net interest income at Bank of America has benefited from
Consumer spending remains resilient, though signs of stress are appearing on the margins, Borthwick told analysts.
BofA added more than 200,000 new net checking accounts during the third quarter, as well as over 1 million credit card accounts across the bank's business groups. In consumer banking, average loans and leases of $311 billion increased by 5% from last year's third quarter.
At the same time, average consumer deposits declined by $89 billion, or 8%, during the same period. Net charge-offs of $911 million increased by $399 million driven by credit cards. BofA added $700 million to its consumer banking loan-loss provisions.
BofA expects the Fed's rate cycle to peak in the coming months, Borthwick told analysts. Net interest income is expected to "trough" in the first half of 2024, he said.
"And then we anticipate modest growth in the second half of 2024," Borthwick added.
