JPMorgan Bond Losses Hit $40 Billion. Bank of America’s Should Be More.

The larger unrealized loss, disclosed in a footnote of its third-quarter financial supplement Friday, reflected the sharp rise in market interest rates during the second quarter. 

The yield on the benchmark 10-year Treasury rose about three quarters of a percentage point to 4.57% during the quarter—the rate is slightly higher now at 4.61%. Yields on mortgage securities also moved much higher in the period. Bank bond portfolios are heavy in Treasury and agency mortgage securities.

The JPMorgan bond loss, which widened by around 20% in the quarter, offers a read on the situation at
Bank of America
(BAC), which had the largest unrealized loss by far in the banking industry at the end of the second quarter at $105 billion on its held-to-maturity bond portfolio.

Barron’s wrote in September that Bank of America’s loss could have widened by $10 billion to $15 billion in the third quarter, but our estimate could prove conservative.
Barclays
analyst Jason Goldberg wrote recently in a client note that the loss could hit $135 billion. Bank of America is due to report its third-quarter earnings on Oct. 17.

Wells Fargo
(WFC) and
Citigroup
(C) also reported third-quarter earnings Friday but they don’t include the market value of their held-to-maturity portfolios. Investors have to wait until their 10-Q reports for that information. 

At the end of the second quarter, Wells Fargo had a loss of $38 billion in that portfolio, while Citigroup had a loss of $24 billion. Given the size of their losses, Citi and Wells Fargo ought to include them in their earnings reports or financial supplements.

Under current accounting rules, losses on bank held-to-maturity portfolios—which as the name suggests are meant to be owned for the long term—don’t need to be reflected in capital ratios. These bond portfolios are carried on bank balance sheets at their amortized cost, not their market values. 

But many investors pay attention to them because the losses are real, and could depress net interest margins in the coming years if deposit rates continue to rise. The yields on these portfolios are below market rates, often in the 2% to 3% range.

Banks also hold bonds in “available for sale” portfolios, and any losses on those holdings depress capital.

Wall Street has largely ignored the loss in JPMorgan’s held-to-maturity bond portfolio, large as it may be, given the bank’s huge capital base including $237 billion of tangible equity at the end of the third quarter. The JPMorgan portfolio totals nearly $400 billion. The bond losses didn’t come up on JPMorgan’s earnings conference call Friday morning.

JPMorgan stock is up 3% Friday to $150.28 as its third-quarter profits of $4.33 a share comfortably topped the consensus estimate of nearly $4, and were even higher when excluding one-time charges.

The Bank of America bond losses, however, have become an issue on Wall Street, and have weighed on its stock, the worst performer among shares of the six largest banks in the country. Bank of America stock, at $27.15, is up 1% Friday, but are down 18% so far this year, while JPMorgan stock is 11% higher.

Bank of America’s losses on its $600 billion-plus held-to-maturity portfolio amounted to a big chunk of its $184 billion of tangible equity at the end of second quarter.

JPMorgan’s losses are much lower than those of Bank of America’s because CEO Jamie Dimon decided not to invest as heavily in bonds when rates were at historic lows in 2020 and 2021.

Bank of America executives have said the held-to-maturity portfolio, mostly agency mortgage securities with minimal credit risk, will ultimately mature and that the losses will melt away over time. The overall portfolio has a weighted average life of about eight years.

The bank’s view is that its huge, low-cost deposit franchise of nearly $2 trillion effectively becomes more valuable when rates rise, and acts as an offset to the decline in the value of the bond portfolio.

Write to Andrew Bary at [email protected]