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Fitch Affirms Bank of America's Long-Term IDR at 'A'; Outlook Stable
September 28, 2017 / 9:30 PM / 2 months ago

Fitch Affirms Bank of America's Long-Term IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 28 (Fitch) Fitch Ratings has affirmed Bank of America Corporation's (BAC's) Long-Term and Short-Term Issuer Default Ratings (IDR) at 'A'/'F1', respectively. The Rating Outlook is Stable. The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs). KEY RATING DRIVERS IDRs, VR, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING Today's rating action is reflective of the company's strong franchise, improving earnings profile, strong liquidity position and satisfactory capital ratios. While BAC operates a number of strong businesses within its Global Wealth and Investment Management, Global Banking, and Global Markets segments, Fitch believes sustained improvement in the company's highly scalable Consumer Banking segment could help to significantly boost overall operating performance. As measured by both revenue and earnings contribution to the overall company, BAC's Consumer Banking segment remains the company's largest business segment. While the revenue and market environment for BAC and its peer banks remains challenging, management has continued to optimize the company's overall operating cost structure across all of its businesses. This has included automating previously manual processes, upgrading systems and controls, net reducing headcount, reducing and re-formatting the branch network, and moving some of its business functions into a self-service format. The result has been some positive operating leverage over the first half of 2017 and an overall efficiency ratio that improved to 63% over the first half of 2017, and to 60% in the second quarter of 2017 (2Q17). Fitch continues to believe that BAC has further opportunities to optimize both its cost structure and the delivery of service in many of its businesses while continuing to invest across the platform. In Global Wealth & Investment Management this includes improving customer interfaces and providing Financial Advisors additional tools to profitably service more clients. In Consumer Banking this includes continuing to optimize the branch network as well as continuing to develop and enhance digital sales channels. In Global Banking and Global Markets this includes continuing to simplify the organizational structure and operating model to service clients more efficiently to invest in growing the franchise. To the extent that management is able to realize efficiencies from the efforts noted above as well as others, Fitch believes that BAC's overall efficiency ratio could begin drop below management's 60% long-term target. Should this target be consistently achieved, this could lead to low double digit returns on average equity, which Fitch believes would help to consistently narrow the gap between BAC's earnings and those of its peers. While efficiency initiatives remain a key lever for management to pull, BAC does have significant revenue opportunities primarily related to improvements in overall net interest income (NII). As of 2Q17, NII comprised 49.1% of overall revenue, and Fitch believes that should short-term interest rates continue to rise, NII should easily exceed 50% of the company's overall revenue composition. BAC estimates that as of 2Q17, an additional 100 basis point parallel shift in the yield curve could increase NII by $3.2bn, or 7.1% of 2Q17 NII annualized, over the next 12 months. While this would increase NII as a percentage of overall net revenue and provide a significant boost to overall operating results, Fitch notes that the impact of rising short-term interest rates on BAC's net interest yield (NIY) has so far been less than anticipated. To the extent that the interest rate increase do not drive overall net revenue growth, BAC's operating performance may not improve as much. Nevertheless, should future rate increases more meaningfully impact the company's NIY and should BAC, experience more loan growth through both increased loan utilizations and growth in lending commitments, it is possible the company could consistently achieve its efficiency ratio targets and operating performance targets, absent any significant deterioration in credit performance. Fitch continues to believe that credit metrics for BAC and the rest of the industry remain at or near cyclical troughs. In 2Q17, BAC's overall net charge-off (NCO) ratio remained low at 40 basis points. This low NCO ratio included a modest improvement in overall consumer credit metrics and a modest deterioration in commercial credit metrics. Should overall credit metrics begin to deteriorate as interest rates continue to rise, it's possible that some of the NII benefit discussed above could be offset by increased provisioning. However, Fitch views BAC's overall allowance for loan and leases losses of $10.9 bilion, or 1.2% of total loans and leases, as reasonable. BAC's liquidity position continues to be strong and supported by its very strong retail deposit base. Total deposits as of 2Q17 were $1.2 trillion, or 56% of total assets. This is a key advantage for the company relative to some peers and is supportive of today's actions. BAC's capital position remains satisfactory for the company's rating level, though the Basel III Common Equity Tier 1 ratio (CET1) is below that of peer averages. As of the end of the 2Q17, BAC's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches (BAC's binding constraint) was 11.5%. Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR), which as of 2Q17 was 7% at the parent company (5% requirement) and 7.3% (6% requirement) at its main bank subsidiary, Bank of America, N.A. (BANA). DERIVATIVE COUNTERPARTY RATING The DCR of the parent company is equalized with the long-term IDR. Additionally, the DCRs to Bank of America and to Bank of America, N.A., Merrill Lynch International Bank Designated Activity Company (MLIBDAC), Bank of America Merrill Lynch International Ltd, and Merrill Lynch International are equalized with the long-term IDRs of those entities. SUBSIDIARY AND AFFILIATED COMPANY The VRs remain equalized between BAC and its material operating subsidiaries. The common VR of BAC and its operating companies reflects the correlated performance or failure rate between the BAC and these subsidiaries. However, the Long-Term IDRs for the material U.S. operating entities are rated one notch higher than BAC's Long-Term IDR to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of total loss absorbing capacity (TLAC) requirements for U.S. global systemically important banks (G-SIBs), and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. Additionally, The 'F1' Short-Term IDRs of BAC's bank subsidiaries are at the lower of two potential Short-Term IDRs, mapping to an 'A' Long-Term IDR on Fitch's rating scale to reflect a greater reliance on wholesale funding than some smaller institutions. The 'F1' Short-Term IDRs of BAC and its non-bank operating companies reflect Fitch's view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity. MATERIAL INTERNATIONAL SUBSIDIARIES Merrill Lynch International (MLI) and Bank of America Merrill Lynch International Limited (BAMLI) are wholly owned subsidiaries of BAC whose IDRs and debt ratings are aligned with BHC's because of their core strategic role in and integration into the BHC group. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF for BAC reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BAC becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support. BAC's international entities have a support rating of '1', which is reflective of Fitch's view of institutional support for the entities. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by BAC are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. BAC's subordinated debt is one notch down from BAC's VR, its preferred stock is five notches from the VR, which encompasses two notches for non-performance and three notches for loss severity, and BAC's trust preferred stock is four notches from the VR, encompassing two notches for non-performance and two notches for loss severity. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by BAC reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors of BAC. DEPOSIT RATINGS Deposit ratings are one notch higher than senior debt ratings reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. BAC's international subsidiaries' deposit ratings are at the same level as their senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference. RATING SENSITIVITIES VR, IDRs, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING Fitch sees limited downside to BAC's ratings and notes that the company's ratings are likely near the lower end of their potential rating range. Upside to BAC's VR would likely be predicated on continued earnings performance where BAC's returns consistently match or exceed the company's own targets and also close the gap to peer averages over an extended period. This would likely require BAC to sustainably improve its efficiency ratio below 60% through continued cost reduction initiatives, the realization of revenue growth opportunities, and higher short-term interest rates noted above. Fitch believes this may also cause management to incrementally optimize its business mix by focusing on more scalable and less capital intensive businesses. Should BAC's management continue to execute on its strategy and close the earnings gap relative to peer institutions while maintaining capital and liquidity ratios at least at peer averages, there could be some upside to ratings or the Rating Outlook. However, should management be unable to achieve better profitability over a longer-term time horizon, it is likely that ratings would remain at current levels. Downside risks to ratings, while not expected, include any remaining litigation exposures or other unforeseen charges that result in a significant net earnings loss, such that the company's Fitch Core Capital, regulatory or tangible capital ratios begin to meaningfully decline over a multi-quarter period. Additionally, Fitch expects some credit deterioration across BAC's credit portfolio given the current low point in the credit cycle. Fitch continues to believe that this eventual credit deterioration will be absorbed within the context of the company's current earnings performance. However, if BAC's overall credit quality materially deteriorates beyond peer averages and results in consecutive quarters of a net loss, or the company experiences a severe and unexpected risk management failure, this could also negatively impact the VR. DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' long-term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUBSIDIARY AND AFFILIATED COMPANY All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Thus subsidiary ratings would be sensitive to any change in BAC's VR. MATERIAL INTERNATIONAL SUBSIDIARIES With the Rating Outlook revision to Stable, MLI and BAMLI ratings are sensitive to the same factors that might drive a change in BAC's VR. MLI and BAMLI ratings are sensitive to the same factors that might drive a change in BAC's IDRs. SUPPORT RATING AND SUPPORT RATING FLOOR Support ratings would be sensitive to any change in Fitch's view of support. However, since support ratings were downgraded in May 2015, there is unlikely to be any change to support ratings. BAC's international entities Support Rating of '1' is sensitive to any change in Fitch's views of potential institutional support for this entity. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid ratings are primarily sensitive to any change in BAC's VR. DEPOSIT RATINGS BAC's deposit ratings are sensitive to any change in the IDRs, which are sensitive to any change in the VRs, as the IDR receives a one-notch uplift from the VR. Thus, deposit ratings are ultimately sensitive to any change in the VR. Fitch has affirmed the following ratings with Stable Rating Outlooks: Bank of America Corporation --Long-Term IDR at 'A'; Outlook Stable; --Derivative Counterparty Rating 'A(dcr)'; --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'; --Long-Term market linked securities at 'A emr'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Viability Rating at 'a'; --Preferred stock at 'BB+''; --Support at '5'; --Support floor at 'NF'. Bank of America N.A. --Long-Term IDR at 'A+'; Outlook Stable; --Long-Term senior debt at 'A+'; --Derivative Counterparty Rating 'A+(dcr)'; --Long-Term subordinated debt at 'A-'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Long-Term deposit rating at 'AA-'; --Short-Term deposits at 'F1+'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'. Bank of America California, National Association --Long-Term IDR at 'A+'; Outlook Stable; --Short-Term IDR at 'F1'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'. Merrill Lynch & Co., Inc. --Long-Term senior debt at 'A'; --Long-Term market linked notes at 'Aemr'; --Long-Term subordinated debt at 'A-'; --Short-Term debt at 'F1'; Merrill Lynch, Pierce, Fenner & Smith, Inc. --Long-Term IDR at 'A+'; Outlook Stable; --Short-Term IDR at 'F1'. BofA Canada Bank --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'; --Short-Term IDR at 'F1'. BofA Finance, LLC --Long-Term senior debt at 'A'. Merrill Lynch International Bank Designated Activity Company --Long-Term IDR at 'A'; Outlook Stable; --Derivative Counterparty Rating 'A(dcr)'; --Short-Term IDR at 'F1'; --Support at '1'. Bank of America Merrill Lynch International Limited --Long-Term IDR at 'A'; Outlook Stable; --Derivative Counterparty Rating 'A(dcr)'; --Short-Term IDR at 'F1'. Merrill Lynch International --Long-Term IDR at 'A'; Outlook Stable; --Derivative Counterparty Rating 'A(dcr)'; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch B.V. --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Long-Term market linked securities at 'A emr'; --Support at '1'. Merrill Lynch & Co., Canada Ltd. --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'. BAC Canada Finance --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch Japan Finance GK. --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Support at '1'. Merrill Lynch Japan Securities Co., Ltd. --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch S.A. --Long-Term market linked securities at 'Aemr'. Countrywide Financial Corp. --Long-Term senior debt at 'A'. Countrywide Home Loans, Inc. --Long-Term senior debt at 'A'. FleetBoston Financial Corp --Long-Term subordinated debt at 'A-'. LaSalle Funding LLC --Long-Term senior debt at 'A'. MBNA Corp. --Long-Term subordinated debt at 'A-'. --Short-Term debt at 'F1'. NationsBank Corp --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'. BAC Capital Trust VI-VII BAC Capital Trust XI - XV --Trust preferred securities at 'BBB-'. BAC AAH Capital Funding LLC I - VII BAC AAH Capital Funding LLC IX - XIII --Trust preferred securities at 'BBB-'. BankAmerica Capital III BankBoston Capital Trust III-IV Countrywide Capital III, V Fleet Capital Trust V MBNA Capital B NB Capital Trust III --Trust preferred securities at 'BBB-'. Merrill Lynch Capital Trust I and III --Trust preferred securities at 'BBB-'. Fitch has withdrawn the following ratings as the entity no longer exists: MBNA Limited --Long-Term IDR 'A-'; Outlook Stable; --Short-Term IDR 'F1' --Support '1'. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Senior Director Julie Solar +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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