30th May 2024

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Business Industry and Financial

“It’s a mess” – Pro blasts Bank of America CEO for its $100B problem

America’s large systematically important banks passed their stress tests. The report by the Federal Reserve provides some relief to policymakers, investors and management. However, Bank of America (NYSE: BAC), popularly known as BofA, is facing a major $100 billion problem.

Bank of America $100 billion problem

The Federal Reserve published its stress test results on Wednesday. While the results were positive, the bank noted that the biggest players in the company were sitting on over $515 billion in paper losses or unrealized losses.

Bank of America, however, is more exposed to this crisis than other companies. For one, its paper losses stand at over $100 billion, which is a fifth of the total amount. In contrast, JP Morgan and Wells Fargo have about $40 billion while Citigroup has $25 billion.

These unrealized losses are what sunk Silicon Valley Bank a few months ago. They happen when banks use customer deposits to buy bonds. At the time, interest rates were at historic lows, leading to higher prices and low yields.

In the past few months, the Federal Reserve has decided to hike interest rates several times. It has moved rates to near zero to over 5%. As a result, bond prices have plunged while yields have risen. Bond prices have an inverted relationship with their yields. In a statement, an analyst said this about Bank of America’s CEO: 

“Brian Moynihan has done a phenomenal job in handling the bank’s operations. But if you look at the bank’s balance sheet, it’s a mess.”

Bank of America is not collapsing

Still, Bank of America is not collapsing. For one, it has a solid balance sheet, with over $3.9 trillion in assets. Also, the bank has said that it had no intention of selling its bond portfolio in the near term. As a result, the bank hopes that the Federal Reserve will cut interest rates in the coming months. Most analysts expect that the first rate cut will happen in 2024.

Bank of America stock has underperformed other bank stocks. Its total return in the past 12 months was minus 12%. In the same period, other American banks like JP Morgan, Citigroup, Wells Fargo, and Goldman Sachs have been positive. The same is true this year as the BAC stock has dropped by 12% while other stocks have eked a small gain.

Meanwhile, Bank of America’s other metrics are not all that good either. Its Return on Equity of 10.47% is below JP Morgan’s 14.25%. Return on assets stood at 1.39%, below JP Morgan’s 1.46%.

The post “It’s a mess” – Pro blasts Bank of America CEO for its $100B problem appeared first on Invezz.

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