Looking for a high-yielding investment option that surpasses traditional choices like CDs or Treasuries? Bank of America (NYSE:BAC) is set to issue a 10-year corporate note with an impressive 6.55% coupon rate. This bond offers a generous interest rate that is 90 basis points higher than the highest coupon certificate of deposits currently available on the market. Not only is it more attractive than other newly issued A or BBB debt from other banks, but it even outperforms Citigroup, a peer bank with a slightly lower credit rating. Plus, Bank of America’s “too big to fail” status adds an extra layer of security for investors.
But what does the bank’s recent report reveal about its financial health and the potential risks for investors?
Bank of America’s Third Quarter Earnings Report
In its recently released third quarter earnings report, Bank of America showcased its resilience in the face of challenges posed by the interest rate environment. Despite these challenges, the risks to the bank remain low. Net interest income (interest income minus interest expense) has remained relatively stable on a quarterly basis, surpassing pre-pandemic levels. This growth in interest income, fueled by higher interest rates, has outpaced the increase in interest expenses.
Let’s dive deeper into Bank of America’s financials to understand the bigger picture:
Interestingly, Bank of America has experienced a decline in total deposits over the past five consecutive quarters. This stands in contrast to initial concerns during the regional banking crisis that uninsured depositors would flock to “too big to fail” banks. However, Bank of America’s shareholdings have continued to grow, despite the need to increase short-term borrowings and long-term debt to compensate for the decline in deposits. Although the bank’s increased borrowing has slightly decreased its interest rate spread, its noninterest income has helped to maintain a healthy net interest margin.
Financial Ratios and Balance Sheet
When compared to the commercial banking sector, Bank of America boasts a healthy balance sheet and strong financial ratios. The bank has strategically increased its cash balance against its deposits to reduce reliance on future borrowing. Furthermore, Bank of America’s loan to deposit ratio remains modest, allowing the bank to continue lending even if deposits fail to grow at a faster rate.
The Appeal of Bank of America’s 6.55% Coupon Bond
Compared to its peers, Bank of America’s 6.55% ten-year bond offers a premium coupon rate. Investors can expect a comparable yield to the bank’s fixed rate preferred shares, which are junior in the capital hierarchy compared to their debt. While the floating rate preferred shares provide even higher yields, investors run the risk of lower dividends should interest rates drop in the near future.
It’s important to note that the 6.55% coupon bonds maturing in October 2033 have call risk associated with them. Starting in October 2025, these bonds can be redeemed at par value every six months. Although investors won’t lose value if they purchase the bond at the issue date or at a discount later, they should consider this call risk as the bond may trade above par in the future. A call is likely to occur if interest rates are lower than at the time of issue, but it should be beneficial for investors to utilize the proceeds in the equity market.
Is Bank of America’s Bond the Right Investment for You?
While investors may typically flock to the safety of short-term Treasury bonds or CDs, it’s worth exploring the attractive rates offered by “too big to fail” banks. Bank of America’s 6.55% coupon bond presents a higher return than many investment-grade fixed income options, all while benefiting from the implicit backing of the United States government.
Before making any investment decisions, it’s crucial to carefully analyze your financial goals and risk tolerance. Considering the current market conditions and your own investment strategy will help determine if Bank of America’s bond offering with a 6.55% yield aligns with your investment portfolio.