Bank of America: Strong Position, Similar Industry Challenges (NYSE:BAC)

shares of Bank of America (New York Stock Exchange: BAC) The past week has seen a sizeable pullback as many banks took a hit during the week in the aftermath of the financial crisis. SVB Financial Group (SIVB) Drama Deployment.

Let’s be clear, many banks saw declines this week, including big banks like Bank of America, but fears of depositors fleeing the market drove share prices. Towards the end of the week (certainly relatively) recovered. Banks may even benefit from this trend.

The last time I worked in this business was in April 2020, and it was never a good time.Earnings in the first quarter fell amid a surge in credit losses following the outbreak of the pandemic, with the stock falling from $35 to $22 at the time of writing. borne the money Given a $2.6 trillion balance sheet, there is a question mark, but that balance sheet has $1.5 trillion in credit risk.

I worried that the banks were too conservative with these terms given the rate at which the company offered bad debt losses. Be more than enough.

and now?

Since my first prediction in the spring of 2020, the stock has peaked at $50 in early 2022 and continued its relentless rally, keeping the stock in the $25s range for most of the rest of 2020. was traded in Impact of credit losses due to rising interest rates, inflation and rapid economic development. Stocks have fallen from $34 to $30 over the last few days on the back of SVB.

Earlier this year, the company announced its 2022 results. This is a very interesting result. The company expects his 2022 sales to grow modestly to $95 billion, with net interest income up nearly $10 billion to $52 billion, but non-interest income down about 10%. to $42 billion. Pre-tax income actually decreased about $3 billion to $31 billion. That’s because the company recorded his $2.5 billion in loan loss reserves. 2021 results were supported by $4.6 billion of the release of these provisions.

Interestingly, the trend of higher net interest income and lower non-interest income was more pronounced in the fourth quarter, with loan loss reserves accelerating to $1.1 billion in the fourth quarter and Bank of America・It increased rapidly because the United States feared a slowdown in the US economy. 2023.

To be clear, this is not a bad debt situation as the situation boils down to two items. First of all, banks typically pay depositors low interest rates and cut government bond rates significantly. This could be addressed by raising deposit rates and losing profits, as it is imperative to avoid deposit outflows. After all, when interest rates rise, the value of loans and investments declines. Because the outflow of deposits can actually cause banks to lock in these losses. A stable deposit base is therefore key to holding the securities the company intends to hold to maturity and avoiding situations where the bank has to sell them at a loss.

Bank of America’s balance sheet is $3.1 trillion, mostly funded by $1.9 trillion in deposits. The company said he has seen a gradual decline in the deposit base throughout 2022, while the mix into interest-bearing deposits has increased during the year, but I don’t read much of it. The company actually paid these depositors $3 billion in the final quarter of 2022 alone (versus just $4.7 billion for the whole of 2022).

The $3 billion annualized number comes down to $12 billion, or about 60 basis points. This is, of course, a very modest rate when T-bill trades at 4% of his and varies. Fortunately, net interest income is trending at $60 billion annually. The company has considerable leeway to raise deposit rates if necessary. However, it will significantly reduce profitability.

According to the latest news, the company has enough liquidity to offset some deposit requests, if any, as the big banks appear to be seeing an influx of depositors. The bank said he ended the year with over $230 billion in cash and equivalents. There are two major asset categories facing some risks. This includes $862 billion of debt securities, of which $633 billion is held to maturity at cost. In addition, on the asset side of the balance sheet, he has $1.3 trillion in loans.

Further expanding the fourth quarter earnings report shows that $113 billion of gross unrealized losses were realized on these debts held to maturity. This is of course a huge number as it was actually down a bit from the third quarter. Equity capital he was reported at $273 billion.

What now?

The truth is that in all reality this is a matter of earnings and many large banks have enough earning power to raise deposit rates. In the best case, banks’ profitability is only affected by narrowing interest rate spreads. Frankly, banks will lose a lot when they mark and market a lot of assets, especially for fixed rate instruments, especially if they have long durations, so keep the deposit base constant. important to keep.

Bank of America has a stable deposit base and a good liquidity position, but the problem is that even banks like Bank of America are forced to sell some of their held-to-maturity securities. It’s that you don’t like getting to a situation. The company lost over $100 billion on these.

Very ironically, interest rates have fallen considerably over the last week against this backdrop. This eliminated the need to raise deposit rates paid, reducing the pressure on asset outflows and thus narrowing the gap with deposit rates. On the other hand, customer awareness is also rising, so there may be an outflow of deposits throughout the industry.

I have traditionally avoided investing heavily in the financial sector, but the lessons of the past clearly show that quality and scale matter. What I want to make clear is that the big names, including Bank of America, are likely to manage this situation better or benefit from deposit inflows rather than deposit base shifts. also due to his M&A).