DBRS Downgrades Bank of America’s Sr. Debt to A (low); ST to R-1 (low) Following Removal of Support

DBRS, Inc. (DBRS) has today downgraded the Issuer and Senior Debt rating of Bank of America Corporation (Bank of America or the Company) to A (low) and its Short-Term Instruments Rating to R-1 (low). Additionally, DBRS downgraded the Company’s main bank operating subsidiary, Bank of America, N.A.’s Deposits & Senior Debt to “A” and its Short-Term Instruments Rating to R-1 (low). Additional ratings actions are listed in the table below. Separately, the Company’s Preferred Stock rating was upgraded to reflect the updated “DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities” released yesterday. All rating outlooks have been revised to Stable.

The rating actions primarily reflect DBRS’s September 4, 2013 removal of the U.S. rating floor resulting in the equalization of the issuer’s intrinsic and final ratings. DBRS no longer ascribes any non-systemic external support to the Company or its subsidiaries precipitating the downgrades. While many of Bank of America’s credit fundamentals continue to improve, they were only able to partially offset the removal of government support from its ratings. DBRS notes that if the improvements are sustained, the ratings could be positively impacted in the future. Today’s rating actions conclude the review with negative implications initiated on September 4, 2013.

In DBRS’s opinion, Bank of America’s financial performance over the past year has generally reflected good underlying business line momentum, improved credit metrics, strong commercial loan growth, and reasonable deposit growth in a challenging operating environment. Given these dynamics coupled with improved management focus, DBRS has returned the rating outlooks to Stable. Nonetheless, the Company’s performance remains pressured from improving, yet still high expenses, elevated legacy and regulatory costs, and a slowing mortgage business.

The Company continues to make incremental and steady progress in putting its legacy issues behind it. While being involved in significant amounts of litigation is not unique to this institution compared to other large diversified banks, the scale certainly is with nearly $44 billion in settlements over the past four years, albeit trending down. The ongoing costs of litigation and settlements remain stubbornly high, but more concerning are lawsuits and litigation that continue to emerge, as the Company remains in the crosshairs of regulators and litigators. DBRS notes that the current rating level incorporates the expectation of court approval of the $8.5 billion BNY Mellon private label RMBS rep/warranty settlement. DBRS believes that Bank of America will continue to absorb elevated costs primarily related to its legacy mortgage business over the medium term through earnings. DBRS see these costs, however, as a drag on its financial performance and a distraction from its core businesses.

The other key challenge for the Company is growing core revenues in a difficult operating environment featuring low interest rates, constrained capital markets activity, increased competition, and expense pressures. Indeed, adjusted core revenue remains pressured, falling in the two most recent quarters. Nonetheless, the Company was able to generate positive operating leverage in the third quarter and 9M13/9M12 (on a DBRS-adjusted basis), as Bank of America has reduced expenses at a higher rate through its effective ‘Project New BAC’ as well as through legacy assets and servicing reductions.

While DBRS is cognizant of improvements in Bank of America’s balance sheet, the Company’s core recurrent earnings power and franchise strength are key drivers for its intrinsic rating level, which have now been equalized with its final ratings. Positively, for fixed income investors, the Company continues to strengthen its balance sheet with mostly improved capital levels, ample liquidity, and an improving credit profile.

Improving operating performance and generating organic growth from its primary businesses while continuing to lower its risk profile could result in positive rating actions. The inability to curtail litigation expense over time and/or difficulty in sustaining earnings momentum could result in negative ratings pressure.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other applicable methodologies include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on August 28, 2014 to reflect actual methodologies used.]

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 27 September 2011

For additional information on this rating, please refer to the linking document under Related Research.