By Telis Demos

In early 2023, when banks were failing or struggling in part because they were stuck holding bonds or loans whose value plunged as interest rates surged, investors were fleeing from banks with big portfolios that were sitting on potential losses.

Not only did those paper losses represent a risk to capital if bonds that had fallen in value had to be sold, but they represented a drag on revenue because of the low yields they were earning.

Fast forward to today. Banks reporting fourth-quarter 2024 earnings are expecting a bump to their core banking income from those portfolios. As older, lower-yielding bonds mature, they can be reinvested at today's far higher yields on both bonds and cash. That can be a boost to net interest income, which is a measure of how much banks earn in yield on cash, securities and loans versus what they pay out on deposits and other funding.

Bank of New York Mellon was a big-gaining bank stock on the first day of earnings season on Wednesday. It gained roughly 8% for the day, about double the KBW Nasdaq Bank Index's rise that session. BNY in its Wednesday earnings report said it expects net interest income to grow by a mid-single-digit percentage in 2025.

Then on Thursday, Bank of America Chief Financial Officer Alastair Borthwick told reporters that his bank expects its full-year 2025 net interest income to grow around 6% to 7%. Its shares were up only slightly on Thursday; the bank has been signaling this trend for a while now.

Contrast these forecasts to those of some other banks. JPMorgan Chase expects a slight decline in its core net interest income in 2025. Wells Fargo expects 1% to 3% growth in its overall net interest income.

There are many inputs that go into these forecasts, so it is hard to isolate precisely what drives faster or slower growth. But one potential differentiator is the magnitude of the effect of maturing older bonds.

BNY's investment securities portfolio represented roughly a third of its total assets on average in the fourth quarter. At Bank of America, debt securities were about 27%. Meanwhile at JPMorgan Chase in that period, investment securities were around 16% of total assets, and at Wells Fargo, debt securities were roughly 21%.

Of course, many banks are still sitting on unrealized, paper losses on their remaining back-books of older, low-yielding bonds. And were the Federal Reserve to surprisingly change direction and start raising rates, the impact of that drag could be magnified once again.

But the passing of the pandemic era, when banks were flooded with excess deposits, also means that banks aren't continuing to park money in securities to the same degree. So even higher rates from here don't mean that history will repeat.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

January 16, 2025 12:42 ET (17:42 GMT)

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