Bank of America’s bet on trading is paying off. Why don’t investors care?

In 2021, Bank of America’s equivalent of the North American air defence system started flashing warning lights. “Norad”, as Glass, the bank’s market analytics platform trained to predict volatility is nicknamed internally, was pointing to a sharp rise in short-term interest rates. BofA switched the positioning of its trading book and told clients to do the same.

It was, in retrospect, a very good market call as the US Federal Reserve started a series of rate increases that took investors off guard.

It also points to a rare bright spot for BofA in a year when much of the rest of its business — and its investment portfolio — has been under pressure from rising interest rates.

Revenue from BofA’s sales and trading business rose $1.1bn, or 9 per cent in the first nine months of the year versus a year ago. That handily outperformed rivals, including Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley, which had seen revenue declines between 3 per cent and 13 per cent in their markets businesses.

“Trading revenues are going to hit a record at Bank of America,” said Barclays bank analyst Jason Goldberg. “None of the other banks can say that.”

Three years ago, Bank of America chief executive Brian Moynihan placed a wager on the lender’s sales and trading division, even as its best-known Wall Street executive, Tom Montag, was on his way out.

One of Montag’s former lieutenants, Jim DeMare, who took over BofA’s markets business, convinced Moynihan in late 2020 to put some of the pandemic-era deposits flooding into the bank to work in the trading business.

DeMare consolidated trading desks, and recruited a Goldman partner, Carlos Fernandez-Aller, to run currency trading. The bank doubled down on commodities, expanding its trading in metals used in batteries and other low-carbon transition materials.

“Our success is not about one trade or taking on more risk,” said DeMare. “But what I am pretty sure of is that when you give clients good ideas, they reward you.”

As the size of BofA’s trading business has grown, so have the risks the bank is taking.

BofA had long shunned block trading, for example, which is when a bank buys a big chunk of stock from a client at a slight discount in the hope of a quick flip at the market price or higher. It now ranks first in blocks, up from fifth in 2020, according to Dealogic.

In late May, BofA bought a $1.2bn block of stock of electric vehicle start-up Lucid Motors, days before its shares started sliding when a deal was announced, potentially creating a big loss for the bank.

A person with knowledge of BofA’s Lucid trade said the bank was “down a lot at some points”. The shares rebounded after a month, and BofA made a small profit, the person said.

Although BofA did not have a single day in which its traders collectively lost money in the first nine months of 2023, its daily average risk position — the most a bank could lose on a typical day — is more than double what it was before the recent retooling of its trading operations.

That metric, which is also influenced by market volatility, rose to an average of $129mn in 2022. The bank has brought down its risk this year to an average of $94mn in the first nine months. Results from the Federal Reserve’s annual stress test earlier this year showed that BofA’s trading operations would lose considerably less than rivals’ in a market downturn.

“I wouldn’t look at it in any suspicious way,” said Rupak Ghose, a former trading firm executive who is now a consultant to start-ups, of BofA’s growing market exposure. “Being able to manage risk is a talent as well.”

Unlike the trading desk, the bank’s treasury team was not so well positioned for rising interest rates. That means success in trading has done little to aid BofA’s ailing stock price, which has been weighed down by large unrealised losses in its long-term bond portfolio.

Shares of BofA are flat this year, compared with JPMorgan’s 24 per cent rise, or the low double-digit improvements at Citigroup, which is undergoing a big restructuring, and Goldman, which has struggled with its diversification efforts.

BofA’s expansion in trading has also come at a time when other banks have been trying to de-emphasise the business because investors see it as too risky. Goldman Sachs, for instance, has spent the past few years building up other businesses — most recently asset management — in order to balance out sales and trading, which has long dominated rivals.

Moynihan said this month he planned to pump still more capital into the business, after putting in almost $180bn in assets since early 2021.

BofA’s business remains smaller than its rivals’. JPMorgan’s sales and trading operation, for instance, is nearly two and a half times as large, generating $27bn in revenue in the first nine months of the year.

“You don’t make money on every transaction that you do,” DeMare said. “It’s about diversification. We do the trades that add value for our clients and more often than not we make money doing them, or we wouldn’t be in this business otherwise.”

Additional reporting by Nicholas Megaw and Tabby Kinder