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Fitch: Bank of America's Earnings Continue to Improve
April 19, 2017 / 1:01 PM / 8 months ago

Fitch: Bank of America's Earnings Continue to Improve

(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) Bank of America Corporation's (BAC) first quarter 2017 (1Q17) earnings continued to show improvement. Reported net income of $4.86 billion in 1Q17 increased 3.4% inclusive of annual compensation accruals from the sequential quarter and 39.8% from the weaker year-ago quarter. The improvements were broad based, with each of the company's business segments generating positive operating leverage on a year-over-year basis. This translated to an overall return on average assets (ROAA) of 0.88% in 1Q17, up from 0.85% in the sequential quarter and 0.64% in the year-ago quarter. Similarly BAC's return on average equity (ROAE) improved to 7.3% in 1Q17, up from 7.0% in the sequential quarter and 5.1% in the year-ago quarter. BAC's earnings benefited from higher interest rates this quarter, reflected in its net interest yield (NIY). BAC's NIY increased to 2.39% at 1Q17, up from 2.23% in the sequential quarter and 2.33% in the year-ago quarter. Higher short-term interest rates should contribute to earnings improvement for the year. BAC remains asset-sensitive, forecasting a 100 basis point parallel shift in the yield curve would benefit NII by $3.3 billion over the ensuing 12 months. While higher rates could lead to lower capital ratios from the mark-to-market in its securities portfolio from accumulated other comprehensive income (AOCI), Fitch believes the increase to retained earnings will over time offset the AOCI impact. This quarter's results remain consistent with Fitch's long-term view that BAC's earnings performance will approach peers. If BAC management narrows the earnings gap sustainably, while maintaining strong capital and liquidity there may be longer-term positive ratings momentum. BAC's Consumer Banking segment revenue was $8.3 billion, an increase of 2.1% relative to the sequential quarter and 5.1% relative to the year-ago quarter. This was due to higher net interest income (NII) amid strong deposit growth and higher short-term interest rates partially offset by lower mortgage banking net income. BAC's Global Wealth & Investment Management generated solid results for the firm with net revenue of $4.6 billion, up 4.7% from the sequential quarter and 2.7% from the year-ago quarter. This was due to a mix of higher asset management revenue and NII offset by lower transactional revenues. Additionally, the segment's profit margin was strong at 27% in 1Q17. Revenue growth in BAC's Global Banking segment was strong. Total net revenue was $4.95 billion, up 8.5% from the sequential quarter and up 11.0% from the year-ago quarter. This was driven by higher NII, advisory fees as well as strong debt and equity underwriting results. BAC's Global Markets Businesses were very strong with total revenue [excluding debt valuation adjustments (DVA)] of $4.8 billion, up 26% from the sequential quarter and 22% from the year-ago quarter. This improvement was driven largely by stronger results in BAC's Fixed Income, Currency, and Commodities (FICC) business segment. FICC benefited primarily due to strong credit related product client activity. Management continues to focus on ongoing expense management initiatives. This includes simplifying the overall organization, reformatting the company's branch count, and optimizing the company's headcount. In 1Q17 BAC reduced its employee headcount by 2% from the prior year period to 209,000 overall employees. These continued efforts, combined with higher revenue growth and partially offset by higher compensation accruals in 1Q17, drove BAC's overall efficiency ratio to 66.17% in 1Q17, up slightly from 65.08% in the sequential quarter but down from 70.54% in the year-ago quarter. Overall BAC's balance sheet as of 1Q17 amounted to $2,247.7 billion, which increased relative to the sequential and year-ago periods due to continued deposit growth and trading assets. The company's overall loan balances were essentially flat relative to the sequential quarter and up 2% relative to the year-ago period. In BAC's Global Banking segment, average loans increased 4% relative to the year-ago, driven by growth in Commercial and Industrial lending, unlike others that have reported thus far. Credit quality across the loan portfolio remains strong, though Fitch believes credit costs across the industry are at cyclical troughs. Overall provision expense was $835 million in 1Q17, $61 million higher than the sequential quarter and $162 million less than the year-ago quarter. This quarter's provision included a $99 million reserve release compared to $106 million in the prior quarter, both due to continued improvements in consumer real estate and energy exposures. In Fitch's view, BAC's funding remains sound with total deposits of $1.27 trillion and a Time to Required Funding (debt coverage at parent) of 40 months, which increased this quarter due to some incremental long-term debt issuance for Total Loss Absorbing Capacity (TLAC) requirements. While not disclosed, Fitch believes BAC is in compliance with Liquidity Coverage Ratio (LCR) requirements. BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio increased slightly under the advanced approaches to 11.0%. While this CET1 ratio remains below the average of some peer institutions, the denominator of the ratio does include $500 billion of operational risk weighted assets (RWA), which is approximately one third of the total RWA for the company. This compares to $400 billion of operational risk RWA or 26.6% of total RWA for JP Morgan and $329bn of operational risk RWA or 28.2% of total RWA for Citigroup. Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company. The bank level SLR is at 7.2%, well above the 6% minimum, and 7.0% at the parent company, well above the 5% requirement. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Julie Solar Senior Director +1-312-368-5472 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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