Morningstar DBRS Confirms Bank of America Corporation at AA (low), Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Bank of America Corporation (BAC or the Company), including the Company's Long-Term Issuer Rating of AA (low). At the same time, Morningstar DBRS confirmed all the credit ratings of its primary banking subsidiary, Bank of America, N.A. (the Bank). The trend for all credit ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is AA, 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 CREDIT RATING CONSIDERATIONS
BAC's credit ratings reflect its well-performing, fully scaled and highly diverse franchise. It also recognizes the Company's strong balance sheet fundamentals including ample levels of liquidity and capital. Furthermore, BAC is well-positioned for ongoing franchise and revenue growth given its leading positioning and strong momentum it has shown across its business lines. We view BAC's earnings as highly diversified and well-balanced between net interest and non-interest income sources, which reduces earnings volatility under various interest rate scenarios.

The credit ratings also incorporate our expectation that credit fundamentals could weaken from their current solid levels. However, we view BAC as having a strong risk management culture and expect any weakening of asset quality to be modest and in-line with the industry. Lastly, the credit ratings also consider BAC's large held to maturity investment securities portfolio which has seen its value diminish with higher interest rates. We expect that over time unrealized losses in this portfolio will be reduced through maturities and prepayments. Additionally, given BAC's very strong funding profile holding these securities to maturity should not be an issue. Moreover, the large securities portfolio also has a significant amount of lower yielding assets that have contributed to a lower-than-peer net interest margin although the reinvestment of those lower-yielding assets, as they mature or prepay, into assets at current, higher yields has benefited net interest income.

CREDIT RATING DRIVERS
Over the longer term, a significant and sustainable improvement in profitability metrics while maintaining a similar risk profile would result in a credit ratings upgrade. Conversely, a sustained deterioration of earnings or a significant weakening of balance sheet fundamentals would result in a credit ratings downgrade. Additionally, any indications of meaningful franchise impairment due to risk management deficiencies or operational missteps would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
The credit 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 is estimated to have 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, Morningstar DBRS sees the Company's scalable business model and full banking capabilities as supportive for continued growth. Overall, these large, diverse businesses allow the Company to leverage its strengths in response to changing market opportunities.

Earnings Combined Building Block (BB) Assessment: Strong / Good
Earnings are highly diversified and resilient with 2024 revenues benefitting from organic growth including higher asset management fees, investment banking fees as well as increased sales and trading revenues. The Company reported net income of $20.5 billion in 9M 2024, down from 9M 2023 earnings reflecting non-interest revenue growth offset by lower net interest income, higher expenses and provision for credit losses. Net income for 9M 2024 resulted in a good return on average assets of 0.84% and return on average common shareholders' equity of 9.59%. BAC is expected to benefit in 2025 from a more conducive M&A environment.

Risk Combined Building Block (BB) Assessment: Strong
Asset quality metrics remain sound. Specifically, non-performing assets remain low at 0.54% of total loans and foreclosed properties as of September 30, 2024, slightly worse than the 0.48% of total loans and foreclosed properties reported a year ago. Meanwhile, net-charge-offs, while higher, remained manageable in Q3 2024 at 0.58% of average loans and have been relatively stable over the last three quarters. While asset quality metrics could weaken in future quarters, we view BAC as well positioned to absorb higher levels of losses. While acknowledging the risks associated with BAC's sizable Global Markets businesses, Morningstar DBRS sees the Company as having effective risk management capabilities that allow it to make appropriate risk/reward decisions and ensuring the capital market balance sheet remains appropriately sized.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
BAC's balance sheet remains strong. The Company's funding and liquidity profile is underpinned by its $1.9 trillion consolidated deposit base. Due to the business mix and funding needs, the Company's 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. Global Liquidity Sources, including cash and highly liquid securities, averaged $947 billion in Q3 2024, representing a significant 28% of total period-end assets.

Capitalization Combined Building Block (BB) Assessment: Strong
At September 30, 2024, BAC's CET1 ratio was 11.8% (standardized approach) and its supplementary leverage ratio stood at 5.9%. Both ratios remain well-above regulatory requirements and the CET1 ratio is 112 basis points above the new regulatory minimum effective on October 1, 2024. BAC has historically utilized stock buybacks to manage excess capital levels, relative to its internal targets. While regulatory capital requirements could increase with the implementation of pending new Basel III endgame capital rules, we view BAC as well positioned to meet these requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/444507

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 04, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

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

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

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

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