BofA grows securities book, but shuns US Treasuries

The bank adds $78.7bn in Q2, mostly in the held-to-maturity book

Bank of America grew its debt securities book 9.2% to $935.7 billion in the second quarter, piling into mortgage-backed securities (MBSs) but refraining from yet more purchases of US Treasuries.

The bank’s held-to-maturity (HTM) book – virtually all MBSs guaranteed by US agencies – grew 13.1% to $651.4 billion over the three months to June 30, marking the seventh consecutive quarterly rise.



In contrast, debt securities held at fair value, which had ballooned in the first quarter as the bank gobbled up US Treasuries, expanded by just 1.2% in Q2, to $284.2 billion, mostly from MBS purchases. US Treasuries made up $158.7 billion of the total, up $339 million from three months earlier.

What is it?

A bank’s securities holdings are typically classified in one of three ways. Held-to-maturity securities are those it intends to keep on its books over the long term. Trading assets are those it plans to sell for a profit. Available-for-sale (AFS) assets occupy a middle ground, meaning they can be either held to expiry or sold.

These classifications matter as they dictate how the securities are valued for accounting purposes. AFS and trading securities are marked-to-market, meaning their values fluctuate depending on what a potential buyer is willing to pay for them. HTM securities, in contrast, are accounted for at book value, meaning their values are fixed at what they were worth when the bank first acquired them.

For this analysis, Risk Quantum used amortised cost values for HTM securities and fair values for AFS, trading and other securities. Fair-value totals in the analysis include both AFS securities – for around 78% as of Q2 – and other securities, which BofA said are primarily non-US securities used to satisfy certain international regulatory requirements.

Marked-to-market unrealised gains or losses on AFS securities are generally counted as accumulated other comprehensive income (AOCI) in banks’ accounting statements. Top banks in the US have to adjust their book equity for AOCI fluctuations, meaning these affect their regulatory capital ratios.

Why it matters

At the height of the pandemic, BofA’s hoarding of top-grade securities was arguably driven by uncertainty, with the bank making sure it had a sizable AFS piggy bank and a steady source of income from HTM yield as base rates edged ever lower.

Since then, the bank’s management has said security purchases were the only way they could put surging deposits to work in the face of anaemic loan demand. After shrinking 2.4% in Q1, loans and leases, net of loss allowance, grew just 2% in Q2, to $904.8 billion. Deposit liabilities, meanwhile, climbed 10% and 1.3% over the same periods, to more than $1.9 trillion.

The securities strategy did net the bank a profit, thanks to the Fed repeatedly cutting rates further than anybody expected, boosting the value of fair-value securities. But on Wednesday’s earnings call, chief executive officer Brian Moynihan telegraphed that as long as loan volumes’ growth lags that of deposits, the difference will go into debt instruments – even if current yields are hardly the most attractive.

Though the securities build-up isn’t likely to reverse soon, the latest quarter may still have kickstarted a shift in balance sheet strategy.

On April 1, the Fed re-included banks’ exposures to US Treasuries and central bank reserves in the supplementary leverage ratio. Over the following three months, BofA cut its interest-bearing balances with the Fed and other central banks by 20.3%, to $260 billion, while keeping a firm lid on US Treasury holdings. It’s reasonable to think that, once the leverage relief expired, BofA opted to funnel its Fed savings into instruments with higher yields than Federal debt.

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