DBRS: Bank of America’s 4Q13 Improved Performance Constrained By Legacy Issues

Summary:

• 4Q13 earnings (to common) of $3.2 billion up 43.5% QoQ on tax benefits and lower rep/warranty provisions. $2.8 billion increase YoY on lower credit loss and rep/warranty provisions.
• Legacy issues drove expenses up 5.6% QoQ but overall program cost saves delivered 5.7% reduction YoY with more projected savings to be realized.
• DBRS rates Bank of America Corporation Issuer & Senior debt at A (low) with a Stable trend.

DBRS Inc. (DBRS) considers Bank of America Corporation’s (BAC or the Company) 4Q13 financial results to reflect general performance improvement. The $1.2 billion increase in litigation expense over the quarter was a reminder, however, of the potentially significant legacy issues that remain outstanding. Nonetheless, expenses (ex-litigation) are trending down from effective program reductions. A powerful underlying franchise with strong market positions and extensive U.S. geographic coverage characterizes the Company which has dramatically improved its capital, funding, liquidity and asset quality over time.

Individual business segments generally performed well. Global Markets surprised to the upside with a strong 4Q performance as FICC revenues grew 16% over the year on credit and mortgage products with equities revenue up 27% YoY and Global Banking grew revenue 7% QoQ and nearly 9% YoY. Another standout, Global Wealth & Investment Management (GWIM) has performed consistently well over the year growing revenue and earnings as client balances flow in and deposits grow. GWIM returned 31% on average allocated capital in 4Q13.

Asset quality continued to trend positively across all metrics with net charge-offs (excluding updated TDR regulatory guidance) down 11 bps to 0.62% in 4Q13 and the Company benefitted from a $1.1 billion reserve release in the quarter. DBRS notes that liquidity is quite ample with Global Liquidity Excess Sources at $376 billion and a 38 month Time to Required Funding. Better capitalization (regulatory and tangible) and a smaller debt footprint round out the picture of a strengthening franchise that is working to put its legacy issues behind it.

DBRS rates Bank of America Corporation Issuer & Senior debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]