DBRS Ratings Unchanged After Q2 Earnings of BAC; Senior at A

DBRS has today commented on the Q2 2009 operating performance and earnings of Bank of America Corporation (Bank of America or the Company). DBRS sees Bank of America’s ratings as unaffected by Q2 2009 results. The Company’s “A” Issuer & Senior Debt rating (downgraded on April 23, 2009) reflect its status as a Critically Important Banking organization (CIB) in the United States. CIBs benefit from DBRS’s floor rating of “A” for bank holding companies and A (high) for banks with short-term ratings of R-1 (middle). Given the nature of the rating floor, these ratings have Stable trends.

While DBRS views positively the Company’s generation of quarterly net income of $3.2 billion (before preferred stock dividends) and income before provisions and taxes of $16.1 billion in a difficult operating environment, the earnings also included two large one-time items ($5.3 billion pre-tax gain from the sale of China Construction Bank (CCB) shares and the $3.8 billion pre-tax gain on the merchant processing joint venture with First Data. DBRS believes that the combined challenges of continued credit deterioration, disrupted markets, multiple integrations, supervisory activity, management continuity and talent retention will constrain the Company’s performance and earnings in the near term.

Business results were mixed as some positive performance gains were somewhat offset by steep credit costs and one-time charges. Similar to the first quarter, results reflected recovery in Merrill Lynch’s investment banking businesses (especially sales & trading) with investment banking fees increasing $591 million from Q1 2009 to $1.6 billion as both equity and fixed income underwriting experienced strong growth. Mortgage banking fees (consolidated) at $2,527 million were down 24% from $3,314 million in the first quarter but were nearly five times the $439 million level of a year ago before the acquisition of Countrywide reflecting relatively strong production but declining revenue levels due to lower margins. Another positive trend was declining market disruption charges of $1.3 billion compared to $1.7 billion in the first quarter and $4.6 billion in Q4 2008. On the other hand, net interest income was down 6.9% from the first quarter as deleveraging and declining interest rates pressured the Company’s net interest margin. The results of several fee areas were also impacted by the volatility introduced from value adjustments on notes and derivatives which accounted for $5.2 billion in losses in the quarter.

Risk reduction continues to be a central theme for Bank of America. In the quarter, the Company reduced its super senior CDO, credit default swap with monoline financial guarantors, leveraged loan and capital market commercial mortgage exposures. Liquidity exposure to off-balance sheet special purpose entities was also materially reduced.

Credit quality deterioration was broad-based in the quarter both across portfolios. DBRS expects this broad deterioration in credit trends to continue as the impact of a recessionary economy and increasing unemployment is being exacerbated by declining housing prices. Company-wide NCOs were $8.7 billion for the second quarter (3.64% of average loans), a 25% increase from Q1 2009 with nearly every category reflecting substantial increases in charge-offs. Credit card managed losses increased 33% over the quarter to $5,047 million as losses climbed from 8.62% to 11.73%. Nonperforming assets were also up more sharply, rising $5.35 billion from Q1 2009 to $31 billion (or 3.31% of total loans, leases and REO) at June 30, 2009. On a positive note, 90 day past dues loans rose less than 1% in the quarter and 30 day past dues stabilized or declined in most consumer categories. Stressed consumer geographies, California and Florida in particular, continue to produce disproportional amounts of losses. The Company prudently added substantial reserves with a quarterly provision that was $4.7 billion in excess of NCOs. In terms of coverage, Bank of America’s $33.8 billion allowance for loan losses (excluding the reserve for unfunded lending commitments) was 1.09x nonperforming assets (including foreclosed properties) and 3.59% of total loans and leases.

Bank of America’s capital ratios have been substantially strengthened by capital raising in the quarter. The Company raised $13.5 billion from common stock issuance and another $14.8 billion via preferred share exchanges. Together with the $4.4 billion Tier 1 benefit from the sale of CCB shares, the $3.2 billion Tier 1 benefit from the First Data joint venture and other actions, Tier 1 capital rose 184 basis points (bps) in the quarter to 11.9% and Tier 1 common rose 241 bps to 6.9%, both providing substantial cushions above regulatory requirements. The Company’s tangible common equity ratio also improved 154 bps over the quarter to 4.7% which represents an improvement from the third quarter low of 2.75% and moving closer to the range of its similarly rated peers. Liquidity and funding remained sound as the Company benefits from various Fed liquidity facilities and strong deposit franchises within its diverse businesses. Moreover, the Company continues to grow its deposit base with total average deposits rising 1.1% over the quarter (4.4% annualized) with 9.4% growth in noninterest bearing deposits. This performance is especially noteworthy given the planned runoff of both legacy high-yield Countrywide ($6.3 billion) and foreign deposits ($8.7 billion) in the quarter.

Bank of America’s ratings are underpinned by a strong franchise with top market positions in deposits, mortgage lending, small and middle market business lending and credit cards. With the addition of Merrill Lynch, the Company now also has prominent market positions in investment banking, various capital markets businesses and one of the largest Wealth Management businesses in the world.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.