Bank of America hurt by rising losses in credit cards, office loans

Though Bank of America’s profits dipped in the first quarter as it built a larger cushion for bad credit cards and office loans, bank executives are optimistic they’ve pulled the appropriate levers to manage credit going forward.

The Charlotte, North Carolina-based bank reported that its net charge-offs increased by more than 80% from the same period last year, from $807 million to $1.5 billion, as consumers struggled to pay off their credit card debt and turbulence in the commercial real estate sector continued. To manage the rising credit risk, Bank of America posted a $1.3 billion provision for credit losses, up from $931 million a year earlier.

“All of this is still well within our risk appetite and our expectations, and it’s consistent with the normalization of credit we’ve discussed with you in prior calls,” Chief Financial Officer Alastair Borthwick said Tuesday on the bank’s quarterly earnings call.

Bank of America reeled in net income of $6.8 billion last quarter, down from $8.2 billion in the first quarter of 2023, dampened in part by the credit-loss provision and a special assessment from the Federal Deposit Insurance Corp. related to bank failures last spring. The bank’s stock price fell Tuesday by 3.5% to $34.68.

The company provided more information about its exposure to office loans, which has been a hot topic among regional banks that tend to have bigger office loan portfolios. Bank of America has about $17 billion in office loans, which is just 1.6% of its loan book. Some 12% of the bank’s office loans were classified as nonperforming in the first quarter, while 16 loans were charged off.

Some $7 billion of the company’s office loans, or roughly 41% of its portfolio, are slated to mature this year. About half that figure will mature in 2025 and 2026, which implies the losses have been “front-loaded and largely reserved,” Borthwick said.

“We’re using a continuous and thorough loan-by-loan analysis, and we’re quick to recognize impacts in the commercial real estate office space through our risk ratings,” Borthwick said on the company’s earnings call. “As a result … we’ve taken appropriate reserves and charge-offs.”

Last month, Bank of America CEO Brian Moynihan told Bloomberg Television that problems in the commercial real estate sector will be a “slow burn.”

Banks’ property loans have faced increased scrutiny in recent months, though most of the focus has been on regional lenders. Among the U.S. megabanks, Wells Fargo also reported an annual rise in charge-offs in its commercial real estate portfolio in the first quarter.

Bank of America’s bigger credit troubles last quarter, however, were in the consumer sector, which accounted for two-thirds of its credit losses. Credit card charge-offs hit a rate of 3.62%, their highest level since a decline during the COVID-19 pandemic, when consumers were buoyed by government assistance.

Over the next few quarters, it appears that BofA’s credit card losses may stay at existing levels, or even increase, said David Fanger, senior vice president of the financial institutions group at Moody’s Investors Service.

“Credit card losses are above pre-pandemic levels, and that’s somewhat unexpected,” Fanger said. “It’s not unique to Bank of America, but it’s certainly something that bears watching. It is a headwind. It is now contributing pretty significantly to their provisions in the quarter.”

Despite the rise in charge-offs, Fanger described the bank’s credit performance in the first quarter as “resilient.”

During the quarter, Bank of America logged relatively stagnant loan growth. High interest rates have not only tamped down loan demand, but they have also driven up the cost of deposits.

Yet elevated rates will positively impact asset repricing, Borthwick said.

“Generally speaking, a higher-for-longer [rate environment] is probably better for banks,” he said. “The question will become, ‘Why are rates higher? What’s going on in the economy? Are we talking about inflation? Is it under control? Is it coming down?'” He went on to indicate that inflation does now appear to be under control.

Moody’s Fanger argued that Bank of America’s positive view of the interest rate outlook implies that the company doesn’t anticipate significantly more credit losses.

He also said that Bank of America’s net interest margin, which increased for the first time in four quarters, implies that the strain of higher rates on deposit costs is starting to steadily abate. The bank’s net interest margin of 2.5%, including global markets, was up from 2.47% in the fourth quarter of last year.