Bonds Are a Problem, and One Solution, for Bank of America Trading bonds is working out better than holding them By Telis Demos July 18, 2023 11:04 am ET Bank of America’s overall net interest income was up 14% versus a year earlier in the second quarter. PHOTO: ETIENNE LAURENT/SHUTTERSTOCK Bank of America’s BAC 4.08%increase; green up pointing triangle large bondholdings aren’t helping it as interest rates rise. Its investment in its own bond traders, however, is paying off handsomely. Coming out of a regional banking crisis in which big paper losses on bonds were a major cause, there has been a lot of attention on the securities held by the country’s second-largest bank by deposits. Bank of America’s enormous portfolio including government debt and mortgage bonds—nearly $760 billion at the end of the second quarter, with an unrealized loss of almost $110 billion—is for now a drag on its ability to grow its net interest income. This portfolio yielded 2.44% over the course of the second quarter, which is down from a yield of 2.58% in the first quarter. By contrast, the bulk of the bank’s cash deposited at other banks earned 4.81% on average in the second quarter, thanks to the Federal Reserve’s rate increases. The upshot is a drag on the bank’s ability to grow interest earnings as quickly as peers like JPMorgan, even as higher-yielding loans like credit cards jump. This is despite the cost of the bank’s vast and steady consumer-heavy deposit base remaining relatively quite low, at 1.82% for interest-bearing deposits on average in the second quarter, with more than 31% of its total deposits at period end not even bearing any interest costs. Total debt securities held by Bank of America, quarterly:Source: the company 1Q20222Q3Q4Q1Q'232Q0100200300400500600700800$900billion Bank of America’s overall net interest income was up 14% versus a year earlier in the second quarter, less than a 38% gain at JPMorgan Chase excluding what it added from First Republic, as well as a 29% bump at Wells Fargo. But as a giant global bank, that isn’t where the story ends for Bank of America. Because by contrast, its Wall Street unit is outperforming peers. Sales-and-trading revenue in the second quarter was up 3% year-over-year, versus a 22% decline at Morgan Stanley and 10% drop at JPMorgan Chase. Bond trading was particularly strong, growing 7% year-over-year. And investment-banking fees, earned from advising on mergers and capital raising, were up 4% over last year, versus a 6% drop at JPMorgan and only a very slight uptick at Morgan Stanley. This points to one way the biggest global banks have been able to avoid the fate of their regional banking peers. While they can’t totally escape the effects of rising rates on their deposits and investments, they have many other levers to pull to offset them, including Wall Street units that can profit a lot from interest-rate volatility. At Bank of America, notably, it protects its capital levels by designating the vast majority of its bonds as long-term holdings. This locks in those yields, but it also means the bank doesn’t have to reflect the roughly $106 billion of unrealized losses on these so-called held-to-maturity securities in its capital, which in turn allows it to allocate more capital to its Wall Street bankers and traders. Bank of America’s bottom line net income was up 19% overall year-over-year, beating what analysts expected, according to estimates compiled by Visible Alpha, and its stock was trading up more than 4% Tuesday morning. Investors may still want to see more interest-rate benefit from the bank, especially as its bond portfolio shrinks—it is already down to under $760 billion at the end of the second quarter from over $930 billion a year earlier. And investment-banking earnings are often looked at skeptically by investors, since they can be more volatile and depend in part on market conditions. But with its huge scale and wide range of businesses, Bank of America’s bond drag isn’t nearly the earnings problem it might be at almost any other bank.