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As recession fears over the US economy intensify, Berkshire Hathaway’s selldown of its investment in Bank of America could be interpreted as waning confidence in the outlook for America’s second-biggest bank — and by extension the wider banking sector.
Since mid-July, Warren Buffett’s Berkshire has sold almost $7bn of BofA stock in a series of sales, according to Securities and Exchange Commission filings. That cuts the conglomerate’s stake in the megabank from 13.1 per cent to 11.1 per cent.
Recent sales were enough to spook investors. BofA shares have fallen 13 per cent to about $38.50 since July 17, the day Berkshire started selling the stock.
Investors need not panic. BofA shares have enjoyed a huge run, gaining 70 per cent between October 2023 and July. Some profit-taking is normal, especially given the prospect of higher capital gains taxes. Berkshire remains BofA’s largest shareholder. Around the sector, it has a long-standing 21 per cent stake in American Express and more recently built up a 2.9 per cent stake in Citigroup.
The prospect of lower interest rates is also not all doom and gloom. The benefit from higher rates is behind most banks: funding costs have climbed as they compete for deposits. Lower rates would take a bite out of interest income, but they could relieve some of that funding pressure, too.
There should, however, be another benefit for some banks. One part of BofA’s business that stands to gain from lower rates is its enormous bond holdings. Its $882bn debt securities portfolio — which it built up during the pandemic as it put excess deposits to work — was sitting on about $114bn in unrealised losses at the end of June. These are paper losses, which BofA may never have to incur if it holds the debt to maturity or if interest rates start coming down again.
Lower rates will shrink these unrealised losses. About $10bn of the securities from the held-to-maturity portion of the portfolio are maturing each quarter. This allows BofA to redeploy the money at much higher rates. Throw in another $10bn a quarter from maturing fixed-rate auto and mortgage loans. BofA expects these factors to contribute $300mn to its fourth quarter net interest income.
Gains from reinvesting paid-off bonds and loans should offer BofA shares some protection in the quarters ahead, regardless of what Buffett does with the remainder of his stake.
https://www.ft.com/content/a00e556b-5d4a-4a33-8f82-cef65f8ce62f
