DBRS Confirms Bank of America at A (low); Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed all ratings for Bank of America Corporation (Bank of America or the Company) and related entities, including Bank of America’s Issuer & Senior Debt rating of A (low) and its Short-Term Instruments rating of R-1 (low). Additionally, the trend on all long-term ratings, as well as the Short-Term Instruments rating of Bank of America, N.A., the Company’s primary bank subsidiary, has been revised to Positive from Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Bank of America’s ratings reflect its strong U.S. banking franchise, diversified earnings power, and its solid financial profile. The Company has the largest U.S. deposit market share, as well as top tier market positions in mortgage lending and servicing, small and middle market business lending, credit cards and commercial banking. Additionally, Bank of America maintains top-tier market positions in investment banking and sales and trading, while operating one of the largest Wealth Management businesses in the world. The ratings also consider the heightened regulatory scrutiny and enhanced capital demands that come with being a global systemically important bank (G-SIB).

The Positive trend considers Bank of America’s solid financial results, improving credit fundamentals including favorable asset quality, stronger capitalization and ample liquidity, as well as its continued progress in reducing expenses and litigation costs, while putting legacy issues behind it. After years of focusing on the cleanup of legacy issues, it is DBRS’s view that the Company’s core businesses are well-positioned for growth. DBRS notes that improving operating performance and generating organic growth from its primary businesses while maintaining a similar risk profile could result in positive rating actions. Conversely, the trend could revert to Stable if the Company shows difficulty in sustaining earnings momentum. Moreover, additional material litigation or regulatory issues that arise and negatively impact the franchise would also be viewed unfavorably.

The ratings are supported by the Company’s diverse business mix and improving financial profile. For 9M15, Bank of America generated net income of $13.2 billion on net revenues of $64.0 billion. Total adjusted revenues for 9M15 were flat versus the prior year as lower loan yields, lower fixed income sales and trading revenue and lower equity investment income was offset by higher equity sales and trading revenue and higher mortgage banking income. Noninterest expense declined a significant $17.6 billion, or 29% year-on-year (YoY). Excluding litigation expense, which was down roughly $16 billion, adjusted expenses declined a still strong 5% compared to the year ago period, with each line item reflecting improvement. Having met its initiatives with Project New BAC as of 3Q14, the Company remains very focused on controlling costs through its ‘Simplify and Improve’ Initiative, while it also continues to work down elevated expenses associated with Legacy Assets & Servicing (LAS).

While most of the improvement in financial performance has been on bringing down expenses, DBRS notes that Bank of America has been investing in its various businesses. Indeed, the Company has added approximately 1,000 financial advisors, increased sales teams in the consumer bank even with lowering overall headcount, and has been adding loan officers, all of which have been bolstering organic growth. In DBRS’s view, the Company is well-positioned to deliver positive operating leverage in FY16, even without the benefit of rising rates.

Bank of America’s funding and liquidity profile is considered strong, underpinned by its $1.2 trillion U.S. deposit base, the highest among U.S. banks. Due to the Company’s business mix and funding needs, wholesale funding reliance is substantial, albeit improving with a smaller capital markets balance sheet. DBRS notes that the need for additional wholesale funding at the holding company due to the proposed TLAC rules will weigh on large banks’ wholesale funding requirements, and potentially profitability, as the rule starts being phased-in in January 2019. Bank of America maintains a high level of liquidity, with its Global Excess Liquidity Sources totaling $499 billion at 3Q15, representing 23% of total assets. Positively, the Company reported that it is already compliant with domestic, fully phased-in Basel III liquidity coverage ratio rules.

DBRS views Bank of America’s capitalization as sound, as earnings retention has more than offset ongoing capital management activity and balance sheet growth. As of September 30, 2015, the Company’s fully phased-in common equity Tier 1 capital ratio under the Advanced approach was 9.7% on pro-forma basis, which includes certain modifications requested by regulators that increases risk-weighted assets starting in 4Q15. Additionally, Bank of America estimates that its Basel III SLR was 6.4% at the holding company and 7.0% at the Bank level, both well in excess of the required minimums. In March 2015, the Fed asked Bank of America to resubmit an additional capital plan to address certain weaknesses identified in the Company’s capital planning process. Positively, DBRS notes that Bank of America resubmitted its CCAR at the end of 3Q15 and on December 10, 2015 received a non-objection from the Fed.

Bank of America, a diversified financial services corporation headquartered in Charlotte, NC, reported approximately $2.2 trillion in consolidated assets as of September 30, 2015.

Notes:

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015)

The primary sources of information used for this rating include company documents 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: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: 16 May 2001
Most Recent Rating Update: August 21, 2014

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