DBRS Upgrades Bank of America Senior Debt to A, Trend Now Stable

DBRS, Inc. (DBRS) has today upgraded the Issuer & Senior Debt rating of Bank of America Corporation (BAC or the Company) to “A” from A (low), the Deposits & Senior Debt rating of Bank of America, N.A. (the Bank) to A (high) from “A”, and the Bank’s Short-Term Instruments rating to R-1 (middle) from R-1 (low). At the same time, DBRS confirmed BAC’s Short-Term Instruments rating of R-1 (low). The trend on all ratings is now Stable. At the same time, DBRS has withdrawn BAC’s Trust Preferred Securities rating, while existing trusts remain rated. DBRS has also withdrawn the Short-Term Instruments rating of Merrill Lynch & Co., Canada Ltd., as the securities are no longer outstanding. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

DBRS’s intrinsic assessments (IA) for BAC and the Bank were each raised by one notch, to “A” and A (high), respectively. In raising the IA, DBRS recognizes the Company’s consistent progress with strategic initiatives, solid financial results, improving credit fundamentals, including favorable asset quality, stronger capitalization and ample liquidity, as well as continued progress in reducing expenses and 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. The ratings also consider the heightened regulatory scrutiny and enhanced capital demands that coincide with being a global systemically important bank (G-SIB).

The Stable trend reflects DBRS’s view that BAC’s fundamentally stronger balance sheet has positioned it well to cope with the current challenging operating environment, including lower for longer interest rates, uncertainties that are impacting client activity levels, and increased regulatory burden.

The ratings are underpinned by the Company’s diverse business mix that includes consumer and wholesale banking services, wealth management, and capital markets businesses, which contribute to BAC’s franchise strength. The Company has the largest U.S. retail 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, BAC maintains strong positioning in investment banking and sales and trading, while operating one of the largest global wealth management businesses. Of note, BAC’s consumer business is demonstrating positive earnings trends with further improvement expected from rising rates, which will also provide a benefit to the Company’s other businesses. Additionally, the Company’s wealth management businesses are performing well despite environmental headwinds, including low interest rates and a general shift in client investing strategies from active to passive.

BAC’s top line has proven resilient despite the challenging operating environment, averaging approximately $87 billion in annual net revenues over the past five years. The Company continues to make progress with expense initiatives, with its efficiency ratio down to 65% in 9M16, from 85% at the end of 2011, on an FTE basis. BAC has delivered positive operating leverage in 9M16, even without the benefit of rising rates. While considerable progress has been made, returns remain pressured with an ROE of 6.6% and a return on tangible common equity of 9.4% in 9M16.

Credit fundamentals continue to demonstrate improvement, with declining nonperforming loan balances and net charge offs, and higher capital levels. Continuing good asset quality trends are important to maintining the rating. Market risk levels also appear to have been reduced, with an average total VaR of $50 million in 9M16, down notably from post-crisis levels. Additionally, daily trading-related revenues demonstrate a normal distribution without indication of excessive risk taking. As of 3Q16, BAC’s fully-loaded CET1 ratio was 10.9% and SLR was 7.1%. While DBRS notes that BAC’s fully-loaded CET1 ratio is at the low end of its U.S. peer range, the Company has a solid ability to generate capital through retained earnings.
BAC’s funding and liquidity profile is strong, underpinned by its $1.2 trillion consolidated deposit base, the highest among U.S. banks. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable and DBRS expects it to increase somewhat at the holding company due to the proposed TLAC rules. Importantly, BAC expects the impact of TLAC on issuance plans and earnings to be manageable. Reflective of its high level of liquidity, Global Liquidity Sources stood at $522 billion at 3Q16, representing 24% of total assets. Additionally, the Company reported that it is well compliant with LCR requirements.

Bank of America, a diversified financial services corporation headquartered in Charlotte, NC, reported approximately $2.2 trillion in consolidated assets as of September 30, 2016.

RATING DRIVERS
Given the recent upgrade and current challenging environment, DBRS views positive rating action over the near- to medium-term as remote. Over the longer-term, BAC’s continued success in enhancing its franchise by executing on its strategy while improving returns across business segments, combined with continued progress in adjusting to evolving regulatory requirements, could add positive pressure to the rating.

Conversely, negative ratings pressure could arise from a reversal in progress in business positioning, if accompanied by weakening profitability trends. Substantial issues related to misconduct, litigation or operational controls could also pressure ratings, particularly if DBRS perceives that these issues have impaired BAC’s reputation or are causing damage to the core franchise.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Roger Lister
Initial Rating Date: May 16, 2001
Most Recent Rating Update: December 11, 2015

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.