Bank of America: Paying the Price for Prudence

MY OUTLOOK: Navigating Unrealised Losses and Seizing Future Opportunities

Measured against its peers, Bank of America (BofA) has delivered underwhelming returns for investors over the past three years. Its stock is up a mere 2%, a stark contrast to the performance of JPMorgan Chase (67%), Wells Fargo (34%), and Citigroup (20%). This disparity highlights how BofA’s overly cautious balance-sheet decisions during the pandemic are still affecting its valuation.

BofA doubled its holdings in low-yielding Treasuries and mortgage-backed securities between 2019 and 2021, peaking at $980 billion. While logical during a low-interest environment, this strategy backfired when the Federal Reserve began aggressively hiking rates. Fixed-rate securities now yield below 3%, while cash held with central banks yields close to 5.3%. As a result, BofA has accumulated over $100 billion in unrealised losses, reflecting the mark-to-market impact of rising yields on long-term bonds.

However, CEO Brian Moynihan’s leadership signals cautious optimism. The steepening yield curve—the difference between two-year and 10-year Treasury yields at a three-year high of 39 basis points—has historically benefited banks by allowing them to borrow at lower short-term rates and lend at higher long-term rates. Approximately $20 billion in fixed-rate loans and securities mature each quarter, enabling BofA to redeploy capital into higher-yielding assets, which could boost net interest income (NII).

BofA projects NII growth of up to 7% this year, outpacing JPMorgan's 1.5% forecast. Despite this, the market remains sceptical. BofA’s valuation sits at a modest 1.3 times price-to-book, reflecting ongoing concerns over the unrealised losses and their impact on shareholder returns. In contrast, JPMorgan’s conservative approach during the pandemic resulted in smaller unrealised losses, making it better positioned to thrive in the current rate environment.

MY ANALYSIS

While the steepening yield curve is a tailwind for BofA, it’s also a double-edged sword. Rising long-term rates erode bond values, compounding the unrealised losses that have plagued the bank. To turn the tide, BofA must focus on more effective asset allocation, emphasising liquidity and flexibility to hedge against rate volatility.

Longer term, the outlook for dealmaking and trading appears bright, particularly if economic conditions stabilise. If Moynihan’s strategic pivot towards higher-yielding assets proves timely, 2025 could mark a turning point. Yet, in my view, BofA remains a high-risk, high-reward play. Investors need to weigh its growth potential against the persistent drag of its balance-sheet challenges.

In conclusion, BofA’s conservative pandemic strategy offers important lessons for investors and banks alike. While prudence has its place, excessive caution can limit upside potential. As markets evolve, adaptability will be the key differentiator between merely surviving and thriving.