DBRS Morningstar Confirms Long-Term Ratings of Bank of America at A (high), Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the long-term ratings of Bank of America Corporation (BAC or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS upgraded BAC’s short-term ratings to R-1 (middle) from R-1 (low). DBRS Morningstar also confirmed the ratings of BAC’s primary banking subsidiary, Bank of America, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), 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.

KEY RATING CONSIDERATIONS
BAC’s short-term ratings upgrade reflects DBRS Morningstar’s view that regulated banking organizations, including holding companies, are being held to high liquidity standards commensurate with the higher rating on our Short-Term scale.

BAC’s IA of AA (low) reflects the scale and diversity of BAC’s franchise, consistent financial performance, and fundamentally robust balance sheet. Furthermore, BAC is well-positioned for future growth opportunities given its leading positioning across its diverse businesses.

The ratings and Stable trend also consider moderating global economic growth and the expected normalization of credit trends. While we view 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, a more challenging interest rate environment may pressure the net interest margin into 2020.

RATING DRIVERS
BAC’s continued success in enhancing its franchise by executing on strategy, while maintaining or improving returns, could result in positive ratings implications.

Conversely, sustained asset quality deterioration, especially if it highlights weakness in underwriting or risk management practices, could pressure ratings.

RATING RATIONALE
The ratings are underpinned by the Company’s highly-diverse business mix that includes consumer and wholesale banking services, wealth management and capital markets businesses, which all 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 Morningstar 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 good expense management. The Company continues to make progress with expense initiatives, with an efficiency ratio of 57% in 3Q19, on an FTE basis, consistent with recent periods. 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 Morningstar sees the Company’s investment in technology and digital as critical, and views BAC’s average $3 billion annual technology new initiative investment spend over the past several years as contributing to notable competitive advantages. Importantly, the Company has delivered positive operating leverage, although this has moderated in recent periods.

BAC’s risk management, compliance and control functions have strong support from the top of the organization, which is important to the Company’s responsible growth strategy. While we acknowledge the risks associated with BAC’s sizable capital markets businesses, particularly on a global scale, DBRS Morningstar 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 $1.39 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 typically done on a term basis. Global Liquidity Sources, including cash and highly liquid securities, averaged $552 billion in 3Q19, representing 23% of total assets. The Company reported a consolidated liquidity coverage ratio (LCR) of 116%.

As of September 30, 2019, BAC’s CET1 ratio was 11.4% (standardized) and its supplementary leverage ratio (SLR) stood at 6.6%. This compares to a CET1 ratio minimum requirement of 9.5% and an SLR minimum requirement of 5.0%. Supporting the Company’s strong capitalization is its ability to consistently generate capital through 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 2019, BAC received “a non-objection to capital plan”, allowing for BAC to increase its dividend to $0.18/share, and repurchase up to $30.9 billion of shares 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 – Very Strong/Strong; Capitalisation – Strong.

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

The principal methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents, Coalition, Dealogic, Regulatory Data, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.

For more information on this credit or on this industry, visit www.dbrs.com.

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