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BofA (BAC) to Incur $1.6B Charge in Q4 Tied to Libor Transition
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Bank of America (BAC - Free Report) will incur a net non-cash pre-tax charge of $1.6 billion in the fourth quarter of 2023 as it phases out the use of the Bloomberg Short-Term Bank Yield Index (BSBY). The company stated this in a filing with the Securities and Exchange Commission (“SEC”).
The charge will be presented in “revenue through market making and similar activities.”
BofA has been using BSBY in various lending agreements as an alternative to the London Interbank Offered Rate (LIBOR) since 2021. However, in November 2023, the Bloomberg Index Services Limited announced that effective Nov 15, 2024, it would cease publishing this index.
Interest payments on the Bloomberg-indexed loans will transition to the Secured Overnight Financing Rate.
The move by Bloomberg affected the accounting treatment of transactions that were executed using the index. It forced BofA to “de-designate” some interest rate swaps used in cash flow hedges of certain BSBY-indexed loans and to “reclassify into earnings any amounts recognized in the accumulated other comprehensive income category of shareholders’ equity that relate to forecasted cash flows that are now no longer expected to occur.”
BofA expects the $1.6 billion net impact to be recognized back in its interest income through 2026. This charge will lower the company’s common equity tier 1 ratio by eight basis points as of Dec 31, 2023.
BofA, along with other Wall Street biggies like JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , is scheduled to announce fourth quarter and full-year 2023 results on Jan 12.
Investors will be keenly watching banking earnings for insights as to how high interest rates affected banks’ net interest income. The Federal Reserve raised the rates to a 22-year high of 5.25-5.5% in order to control inflation. However, the ultra-aggressive pace of rate hikes turned counterproductive and hurt JPM, BAC and C's financial performance.
Despite being the most interest rate sensitive among its peers, the situation is worse for BAC because of billions of dollars worth of long-dated Treasuries and mortgage bonds, which it had piled up at low rates during the pandemic.
As rates continuously increased, the interest that BofA had to pay on deposits surged while the interest that it received from the above-mentioned long-term securities was relatively low. This resulted in hundreds of billions of dollars of unrealized losses being accumulated on its balance sheet.
This led the investors to turn bearish on the stock. Last year, shares of BofA gained only 1.7% compared with the industry’s rally of 11.7%.
Image: Bigstock
BofA (BAC) to Incur $1.6B Charge in Q4 Tied to Libor Transition
Bank of America (BAC - Free Report) will incur a net non-cash pre-tax charge of $1.6 billion in the fourth quarter of 2023 as it phases out the use of the Bloomberg Short-Term Bank Yield Index (BSBY). The company stated this in a filing with the Securities and Exchange Commission (“SEC”).
The charge will be presented in “revenue through market making and similar activities.”
BofA has been using BSBY in various lending agreements as an alternative to the London Interbank Offered Rate (LIBOR) since 2021. However, in November 2023, the Bloomberg Index Services Limited announced that effective Nov 15, 2024, it would cease publishing this index.
Interest payments on the Bloomberg-indexed loans will transition to the Secured Overnight Financing Rate.
The move by Bloomberg affected the accounting treatment of transactions that were executed using the index. It forced BofA to “de-designate” some interest rate swaps used in cash flow hedges of certain BSBY-indexed loans and to “reclassify into earnings any amounts recognized in the accumulated other comprehensive income category of shareholders’ equity that relate to forecasted cash flows that are now no longer expected to occur.”
BofA expects the $1.6 billion net impact to be recognized back in its interest income through 2026. This charge will lower the company’s common equity tier 1 ratio by eight basis points as of Dec 31, 2023.
BofA, along with other Wall Street biggies like JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , is scheduled to announce fourth quarter and full-year 2023 results on Jan 12.
Investors will be keenly watching banking earnings for insights as to how high interest rates affected banks’ net interest income. The Federal Reserve raised the rates to a 22-year high of 5.25-5.5% in order to control inflation. However, the ultra-aggressive pace of rate hikes turned counterproductive and hurt JPM, BAC and C's financial performance.
Despite being the most interest rate sensitive among its peers, the situation is worse for BAC because of billions of dollars worth of long-dated Treasuries and mortgage bonds, which it had piled up at low rates during the pandemic.
As rates continuously increased, the interest that BofA had to pay on deposits surged while the interest that it received from the above-mentioned long-term securities was relatively low. This resulted in hundreds of billions of dollars of unrealized losses being accumulated on its balance sheet.
This led the investors to turn bearish on the stock. Last year, shares of BofA gained only 1.7% compared with the industry’s rally of 11.7%.
Image Source: Zacks Investment Research
Currently, BAC carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.