2023-12-19 16:21:00
Bank of America’s bank stocks have surged during the year-end rally, but the bank still faces significant unrealized bond losses. The bank, with the largest unrealized bond losses among all banks at the end of the third quarter, has seen these losses reduced significantly thanks to the current market rally.
It is estimated that the bank has approximately $600 billion in losses on government bonds and mortgage-backed loans, but it classified them as not-for-sale assets, meaning held-to-maturity. The current rally reduced the losses on the bond amounts from $130 billion to $100 billion.
In comparison, JP Morgan Chase also faces unrealized bond losses but at a significantly lower estimate of between $30-35 billion, with the number dropping from $40 billion at the end of the third quarter.
One of the most critical voices against Bank of America’s approach is Warren Buffett, the owner of the largest shareholder of the bank, Berkshire Hathaway. Buffett has been vocal about his concerns regarding the bank’s mortgage-backed loans, arguing that they are bad assets to hold in a high-interest rate environment.
Despite the significant losses recorded on paper, Bank of America’s stock has increased by 25% from the end of the third quarter, primarily due to the reduction in losses by a larger amount. The bank’s managers claim that the bank’s investment portfolio, which consists mainly of mortgage-backed loans, carries zero risk. However, the value of the portfolio declines at a rate of about $10 billion per quarter as the mortgages are paid off.
While the bank’s stock has surged, it still lags behind competitors in terms of return on capital. The recent market rally has certainly helped in reducing losses, but the bank continues to face challenges in managing its investment portfolio.
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