DBRS Upgrades Ratings of Bank of America to A (high), Stable Trend

DBRS, Inc. (DBRS) upgraded most of the ratings for Bank of America Corporation (BAC or the Company) and its primary banking subsidiary, Bank of America, N.A. (the Bank), including the Company’s Long-Term Issuer Rating to A (high) from ‘A’. The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank was raised one notch, to AA (low) from A (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA, reflecting the structural subordination of the holding company.

KEY RATING CONSIDERATIONS
The ratings upgrade reflects the strength and diversity of BAC’s franchise, consistent and improving financial performance, and fundamentally robust balance sheet. The Company’s focus on responsible growth supports an effective risk management framework and strong credit fundamentals. With BAC having made significant progress since moving past its legacy issues, which were once a notable distraction to management and an earnings headwind, DBRS sees it as appropriate that the ratings migrate upward. Furthermore, BAC is well-positioned for future growth opportunities given its leading positioning across its diverse businesses.

The ratings and Stable trend also consider the benign credit environment, strong U.S. economy, and supportive administration that are contributing to robust earnings. While DBRS sees BAC as taking the appropriate precautions with regard to riskier lending and extensions of credit, the ratings also consider the underlying risks and interconnectedness of the credit markets at a time when the current credit cycle is potentially in its later stages. Furthermore, DBRS sees that rising interest rates will provide a tailwind to earnings, this could also contribute to asset quality deterioration.

RATING DRIVERS
DBRS sees the ratings as well-placed at the current level. Over the longer-term, BAC’s continued success in enhancing its franchise by executing on its strategy, while improving returns across business segments, could add positive pressure to the ratings.

The trend could be revised to Negative if there were signs of notable credit deterioration that had a prolonged adverse impact on profitability trends. While not expected, 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.

RATING RATIONALE
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 overall 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 wealth management businesses globally. Furthermore, DBRS sees the Company’s scalable business model and innovative mobile/digital capabilities as providing support for continued wallet share gains. BAC’s scale, market positions and diversification provide significant versatility, allowing the Company to leverage its strengths in response to changing market opportunities.

Earnings continue to demonstrate improvement with resilient revenues and a declining expense base. BAC has been relatively consistent in generating top line revenues, averaging just over $85 billion in annual net revenues in the past five years. The Company continues to make progress with expense initiatives, with an efficiency ratio of 58% in 9M18, on an FTE basis. This ratio has been gradually trending downward despite continued investments in the franchise, including new and renovated branches, expansion into new markets, adding client-facing personnel, as well as technology. DBRS sees the Company’s investment in technology and digital as critical, and views BAC’s $3 billion annual technology new initiative investment spend as contributing to notable competitive advantages. Importantly, the Company continues to deliver positive operating leverage, while returns are benefitting from lower provisioning and the lower tax rate. ROACE was a strong 10.9% in 9M18.

BAC’s risk management, compliance and control functions have strong support from the top of the organization, and this is important to the Company’s responsible growth strategy. While DBRS acknowledges the risks associated with BAC’s sizable capital markets businesses, particularly on a global scale, DBRS sees the Company as having effective risk management capabilities that allow it to make appropriate risk/reward decisions. Asset quality metrics are strong with low levels of nonperforming loans and net charge offs.

BAC’s balance sheet remains strong. The Company’s funding and liquidity profile is underpinned by its $1.3 trillion consolidated deposit base. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable, but well-managed. Long-term debt is well-laddered by maturity and the Company has the capacity to issue across markets and to a diversified investor base. Secured funding is done shorter-term, presenting an overnight funding risk, though funding for less liquid assets is done via term facilities. Global Liquidity Sources stood at a high level of $537 billion at 3Q18, representing 23% of total assets, and an LCR of 120%.

As of 3Q18, BAC’s CET1 ratio was 11.4% (Standardized) and its supplementary leverage ratio stood at 6.7%. Supporting the Company’s strong capitalization is its ability to consistently generate capital through retained earnings, while continuing to return significant levels of capital to shareholders. In the Fed’s most recent stress test results, which were released in June 2018, BAC received “a non-objection to capital plan”, allowing for BAC to increase its dividend to $0.15/share, and up to a $20.6 billion share buyback over the coming year.

The Grid Summary Grades for BAC are as follows: Franchise Strength – Very Strong; Earnings Power –Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (July 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial, Coalition, Dealogic and regulatory data. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Lisa Kwasnowski, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 16 May 2001
Last Rating Date: 7 November 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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