© Reuters. FILE PHOTO: A Bank of America logo in the Manhattan borough of New York City, New York, U.S., January 30, 2019. REUTERS/Carlo Allegri/File Photo
By Saeed Azhar and Nupur Anand
NEW YORK (Reuters) -Bank of America reported unrealized losses of $131.6 billion on securities in the third quarter, an increase from the second quarter, but the bank does not expect the portfolio to generate real losses in the long term.
Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at huge losses, precipitating its collapse and fueling the worst industrial upheaval since the 2008 financial crisis.
Analysts say Bank of America is highly unlikely to sell the securities at a loss because the lender has strong liquidity with consumer deposits and increased capital. Holding securities to maturity also gives you the flexibility to avoid mark-to-market losses.
Banks use the held-to-maturity designation to purchase less risky securities that provide downside protection, although in a rising interest rate environment the upside potential is limited.
“These are all unrealized losses on government-guaranteed securities,” Bank of America Chief Financial Officer Alastair Borthwick told reporters on a third-quarter earnings conference call. “Because we will hold them to maturity, we will anticipate that we will not have losses over time.”
Bank of America had reported paper losses of $106 billion at the beginning of the second quarter.
Bank of America, the second-largest U.S. lender, had about $603 billion in securities held to maturity, it said in a filing Tuesday, down from $614 billion in the second quarter.
And yet, holdings of low-yielding assets have also limited the second-largest U.S. lender’s ability to earn higher profits by deploying its cash into money markets or other higher-yielding assets, analysts have said.
“The bank has one of the lowest overall returns on its equity portfolio, and that equity portfolio is there to stay for a while,” said Morningstar analyst Eric Compton.
U.S. banks could be dealing with at least $650 billion of unrealized losses on their securities portfolios, according to an estimate from Moody’s (NYSE:) after prospects for interest rates to stay higher for longer led to a bond market decline in the third quarter.
That would be 15% more than the $558 billion in losses accumulated at the end of the second quarter.
JPMorgan Chase (NYSE:) had unrealized losses of $40 billion on its HTM portfolio in the third quarter.
citi group (NYSE:) did not disclose paper losses in its portfolio during the third quarter. At the end of the second quarter they amounted to $24 billion.
Both banks had no comment beyond the disclosures.
While securities holdings represent an economic drag, the mounting unrealized losses are “not a problem” from an accounting perspective, said Allison Nicoletti, a professor at the Wharton School of the University of Pennsylvania.
“If you had waited, you would have gotten a higher bond yield,” he said. Still, “these are losses on paper; this is a problem only if they have to be sold.”
When banks receive deposits from customers, they can choose to put the excess money to work by purchasing bonds that they hold for sale at market prices. Or they may set rates for securities held to maturity.
