DBRS Ratings Unchanged After Q4 ’09 Earnings of BAC; Senior at “A”

DBRS has today commented on the Q4 2009 operating performance and earnings of Bank of America Corporation. (Bank of America or the Company). Bank of America’s ratings are unaffected by Q4 2009 core results which reflected weaker revenue generation, but generally improved credit quality, and the Company is far better positioned for recovery compared to one year ago. The Company’s “A” Issuer & Senior Debt rating reflects its status as a Critically Important Banking organization (CIB) in the United States. CIBs benefit from DBRS’s floor rating of “A” for bank holding companies and A (high) for banks with short-term ratings of R-1 (middle). Given the nature of the rating floor, these ratings have Stable trends.

Before preferred stock dividends and accelerated accretion of preferred stock, the Company lost $194 million in the quarter reflecting some improvement over the prior quarter and last year’s Q4 as it still struggles to emerge from the debilitating impact of the credit crisis. The total $5.2 billion Q4 2009 net loss included $1.0 billion in preferred dividends and a net $4.0 billion loss associated with the repayment of TARP. This watershed quarter for Bank of America featured a $19.3 billion (gross) common equity raise and repayment of $45 billion in TARP Preferred shares.

Impacting fourth quarter income was the continued elevated ($10.1 billion provision) yet declining credit costs, a $1.9 billion quarter over quarter decline in total trading account profits, the $1.6 billion (pre-tax) cost of tightening credit spreads on primarily Merrill Lynch structured notes and $1.1 billion (pre-tax) in marks on legacy assets. These items were partially offset by a $1.1 billion increase in Blackrock valuation, equity investment gains along with robust performance in investment banking and mortgage fees. The loss is the second consecutively and the third in the past five quarters. Although DBRS sees signs of improvement, the combined challenges of continued high credit costs, business integrations, regulatory uncertainty, management recruitment and talent retention will constrain the Company’s performance and earnings in the near term.

Business results were mixed, as several positive performance gains were somewhat offset by steep credit costs and one-time charges. Similar to the first three quarters of the year, results reflected a significant contribution from Merrill Lynch’s investment banking businesses although the steep $3.0 billion decrease in trading income was only partially offset by stronger investment banking fees (increasing $342 million from Q3), as advisory, equity and debt underwriting improved in the quarter. Market disruption charges were worse at $1.1 billion in the quarter compared with an actual net gain of $200 million in the third quarter, but better than the $1.3 billion charge in the second quarter, $1.7 billion in the first quarter, and $4.6 billion in Q4 2008. Also, the quarterly charge served to further reduce market-related risk including its super senior CDO, credit default swap with monoline financial guarantors, leveraged loan and capital market commercial mortgage exposures. Liquidity exposure to off-balance sheet special purpose entities was also materially reduced.

Global Wealth & Investment Management top and bottom line improved primarily from the Blackrock equity interest gain, but also from improving markets and transactional activity, while provisions and cash support charges decreased. Additionally, the outflow of financial advisors appears to have stabilized at a sales force of about 15,000. Mortgage banking fees (consolidated) at $1,652 million were up 27% from $1,298 million in the third quarter and were 8.5% higher than the year-ago level, as production income softened but net servicing income improved primarily due to improvement in the MSR fair value. Managed core net interest yield expanded 7 basis points (bps) to 3.74% as positioning and improved interest reversals more than offset the $10 billion decrease in managed core average earning assets.

While troubled loan deterioration continued, the pace of non-performing loan inflows slowed and was less than in the previous quarters as consumer near-term delinquencies appear to be moderating. Credit quality improved reflecting less deterioration than expected, however, DBRS still expects credit trends to continue to produce elevated credit costs throughout 2010 as the impact of a recessionary economy and stubbornly high unemployment weigh on consumers and businesses.

Nonperforming assets were up (but less sharply than the prior quarter), rising $1.92 billion from Q3 2009 to $35.7 billion (or 3.98% of total loans, leases and REO) at December 31, 2009 and 90 day past dues loans declined 2.0% in the quarter (net of the purchased $9.4 billion in insured GNMA loans). Positively, credit card 30 day past dues declined (16 bps) for the third consecutive quarter, however 90+ day delinquencies increased 10 bps to 3.86%. Bank of America’s net Q4 2009 loss rates at 11.9% are among the highest of large credit card issuers.

The Company prudently added substantial reserves with a quarterly provision that was $1.7 billion in excess of NCOs (but less than the $2.1 billion last quarter). The largest reserve addition was $800 million added for the change to 12 month reserve coverage for cards and smaller reserve additions for commercial real estate, Countrywide purchased impaired loans, maturing card securitizations, and consumer real estate. Bank of America’s $37.2 billion allowance for loan losses (excluding the reserve for unfunded lending commitments) was 1.04x nonperforming assets (including foreclosed properties) and 3.97% of total loans and leases. Company-wide net charge-offs (NCO’s) were $8.4 billion for the fourth quarter (3.71% of average loans), a 12.5% decrease from Q3 2009 marking the first decline since Q1 2006 with all major categories reflecting substantial decreases in charge-offs except for Residential Mortgage which was flat. Credit card managed losses decreased 11.1% over the quarter to $4.9 billion, as losses fell 102 bps to 11.9% from 12.9%, a marked improvement consistent with other issuers. In residential mortgage, stressed consumer geographies, California and Florida in particular, continue to produce disproportional amounts of losses along with high loan to values (LTVs) and 2006-2007 vintage loans.

In DBRS’s opinion, the appointment of Brian Moynihan as the new CEO is a positive step, filling a key position with an experienced manager familiar with the organization and addressing a weakness in corporate governance that was evident given the unexpected announcement of Ken Lewis’ retirement effective at year end that resulted in a Board of Director’s rush to name a replacement. DBRS believes that successful integration and execution of the Company’s businesses could bring significant competitive and financial benefits to this struggling organization that is essentially a bellwether for U.S. commercial banking.

Bank of America’s capital ratios now reflect the repayment of TARP in the quarter with Tier 1 decreasing 206 basis points in the quarter to 10.40% and Tier 1 common up 56 basis points to 7.81% due to the capital raise, both providing substantial cushions above regulatory requirements. The Company’s tangible common equity ratio also further improved 75 basis points over the quarter to 5.57% which represents a marked improvement from the low of 2.75% in Q3 2008 and is moving closer to the range of its similarly rated peers. The adoption of SFAS 166/167 as of January 1, 2010 will cause the Tier 1 ratio capital ratios to drop 65 to 75 bps and TCE about 50 bps. DBRS views the Company’s maintenance of its regulatory capital ratios as obviously important but recognizes that the negative impact of the accounting change does not reflect an actual change in the Company’s risk profile. Liquidity and funding remained sound with $121 billion in cash and cash equivalents on its balance sheet and the benefit of strong deposit franchises within its diverse businesses. DBRS notes that Bank of America has exited TLGP and has executed non-FDIC guaranteed debt offerings in multiple currencies over the past few quarters. Moreover, the Company continues to grow its core deposit base with average retail deposits growing 1.3% ($8.6 billion) in the quarter with significant inflows from Merrill Lynch financial advisors and a secular shift toward liquid accounts from time deposits. As expected, the runoff of higher-yielding Countrywide deposits precipitated a $2.0 billion decline in average Deposit Segment balances in the quarter.

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.

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 Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.