DBRS Downgrades Issuer & Senior Debt Rating of Bank of America to “A” With Stable Trend

DBRS has today downgraded the long-term ratings for Bank of America Corp. (Bank of America or the Company) and its related entities, including its Issuer & Senior Debt rating to A from A (high). The ratings on Bank of America and its subsidiary Short-Term Instruments has been confirmed at R-1 (middle). The trend on these ratings is Stable having reached the DBRS floor level for critically important banking organizations (CIBs) in the U.S. Bank of America’s Preferred Shares have been downgraded to BB from BB (high) with a Negative Trend. At the same time, DBRS has downgraded the ratings of Bank of America’s subsidiaries, including Bank of America, N.A.’s Deposits & Senior Debt rating to A (high) from AA (low). The trend on these ratings is also Stable. This concludes the review of the Company’s ratings which were placed Under Review with Negative Implications on January 29, 2009.

Today’s rating actions follow the Company’s announcement of its first quarter 2009 results. While the results produced a $4.2 billion profit (before preferred stock dividends) centered on much improved performance from its recent Countrywide and Merrill acquisitions, earnings also contained significant one-time gains and reflected broad-based credit deterioration by product line and geography. Impacting Bank of America with its broad-based national franchise is this deep recession with still rising unemployment that is bringing much more extensive credit deterioration to prime borrowers and businesses than in a normal credit cycle. DBRS continues to view the Company’s near-term core revenue and income as constrained and volatile in this period of acute credit and expense pressure. The downgrade of Bank of America’s long-term rating reflects the sizable challenges that the Company still faces, as it navigates the difficult operating environment while completing its integrations. In seeking to sustain its earnings and integrate its expanded franchise, Bank of America also faces the challenge of retaining its top talent, especially in the current environment with constraints on compensation. DBRS sees the Company’s earnings as remaining under pressure in 2009 in the face of disrupted markets and rising credit costs.

At the same time, this ratings action incorporates the enhanced support now being made available by the U.S. government. The Company’s SA2 support assessment designation assigned January 1, 2009 reflects DBRS’s view that Bank of America is a CIB in the U.S., given its scale and extensive participation in the capital markets, as well as the eligibility criteria established by the U.S. Treasury for its Targeted Investment Program (TIP) and Asset Guarantee Program (AGP). Consistent with DBRS’s Enhanced Methodology for Bank Ratings, February 2009, the Company’s ratings are now at the floor for U.S. CIBs. Even further weakening in the bank’s intrinsic strength rating will not result in a concurrent downgrade of the final rating below the floor rating. Consequently, all ratings that are at the floor have a Stable trend. This perspective is also reflected in maintaining the short-term rating of Bank of America at R-1 (middle), which is not typical for a bank holding company rated “A” that reflects not only Bank of America’s intrinsically strong liquidity but the more extensive provision of liquidity generally to bank holding companies and some of their non-bank subsidiaries under current programs. Preferred share ratings do not benefit from the support implied in the floor rating and may be subject further negative pressure.

Explicit government support has bolstered Bank of America’s intrinsic position. The Company, like other U.S. banks, has received significant explicit support from the U.S. government. In addition to the system-wide liquidity facilities and debt guarantee programs of the Federal Reserve (the Fed) and the Federal Deposit Insurance Corporation (FDIC), Bank of America has benefited from a capital injection through the Troubled Assets Relief Program (TARP). Moreover, the Company has received a capital injection under the Treasury’s TIP and has negotiated a loss-sharing agreement that has yet to be finalized under its AGP associated with the Merrill Lynch acquisition. While Bank of America would retain a substantial first-loss position of $10 billion under the proposal, it would be protected to a significant degree against unusually large losses on an asset pool of approximately $118 billion.

Bank of America’s regulatory capital ratios have been strengthened with its Tier 1 now estimated at 10.1%, a sizable cushion above regulatory minimums. The regulatory capital ratios benefited from the aforementioned capital injections in the quarter and increased retained earnings, however, the ratios do not yet include the potential substantial risk-weighting relief afforded by the asset pool guarantee. The Company’s tangible common equity also improved 20 basis points over the quarter to 3.13% which represents an improvement from the third quarter low of 2.75% but is still below many of its similarly rated peers. Liquidity and funding remained sound as the Company benefits from various Fed liquidity facilities and strong deposit franchises within its diverse businesses.

Bank of America’s ratings are underpinned by a strong franchise with top market positions in deposits, mortgage lending, small and middle market business lending and credit cards. With the addition of Merrill Lynch, the Company now also has prominent market positions in investment banking, various capital markets businesses and one of the largest Wealth Management businesses in the world.

Bank of America’s $4.2 billion profit ($2.8 billion after preferred dividends) in Q1 2009 reflected strong recovery in Merrill Lynch’s investment banking businesses (especially sales & trading), Countrywide’s mortgage business and only $1.7 billion in market disruption charges compared to $4.6 billion in Q4 2008.

Credit quality deterioration was broad-based in the quarter both across portfolios and geographies. DBRS expects this broad deterioration in credit trends to continue as the impact of a recessionary economy is being exacerbated by declining housing prices and an upturn in unemployment. Company-wide NCOs were $6.9 billion for the fourth quarter (2.85% of average loans), a 25% increase from Q4 2008 with credit cards, home equity and direct/indirect consumer loans posting the largest increases over the quarter. Nonperforming assets were also up more sharply, rising $7.5 billion from Q4 2008 to $25.7 billion (or 2.65% of total loans, leases and REO) at March 31, 2009. Underscoring the continuing trend, accruing loans 90 days or more past due increased 17% in the quarter to $6.3 billion. The Company prudently added substantial reserves with a quarterly provision that was $6.4 billion in excess of NCOs. In terms of coverage, Bank of America’s $29.0 billion allowance for loan losses (excluding the reserve for unfunded lending commitments) was 1.21x nonperforming loans (excluding foreclosed properties) and 2.97% of total loans and leases.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Rating Securities Firms Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.