DBRS Confirms Bank of America After Mortgage Settlement – Senior at A (low), Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed its ratings for Bank of American Corporation (Bank of America or the Company), including its A (low) Issuer & Senior Debt rating following the announcement of the $16.65 billion comprehensive settlement with the Department of Justice and various other governmental parties. The announced settlement consists of a cash payments totalling $9.65 billion and borrower relief of approximately $7 billion. Moreover, the settlement includes releases on specific conduct relating to residential mortgages, RMBS and CDOs. The incremental impact of the settlement beyond existing reserves is expected to reduce 3Q14 pre-tax earnings by approximately $5.3 billion. While the settlement was larger than anticipated and follows other settlements, including a 1Q14 settlement that contributed to a quarterly loss, DBRS notes that the Company has put almost all of its material legacy litigation issues behind it. Additionally, the agreement eliminates another distraction enabling management to more fully concentrate on its core businesses.

DBRS’s confirmation reflects the fact that DBRS views the Company as already partially reserved against these legal matters while the remaining portion will be paid from earnings. DBRS sees the incremental settlement impact as about a quarter’s income before provisions and taxes (IBPT) based on recent run rates. As a result, DBRS believes the settlement will likely not materially impact capital adversely. That being said, there are yet 5 weeks left in the quarter and the impact of changes in RWA and OCI are unknown. Positively, Bank of America recently received a “non-objection” to its CCAR resubmission and subsequently increased its dividend. DBRS believes that regulators already had visibility to today’s litigation settlement at the time of the “non-objection”.

While the scale of this litigation expense is well beyond DBRS’s earlier expectations, it should be viewed in the context of the Company’s $5 billion to $6 billion of quarterly adjusted IBPT. DBRS is mindful that the Company continues to negotiate the terms of other settlements, but its remaining legal issues are generally far less material then those now in the rear view mirror. Additionally, in 2Q14, Bank of America noted that the range of possible losses beyond current litigation reserves was zero to $5 billion, which could decline as a result of this comprehensive settlement. DBRS sees this widely-anticipated settlement as finally addressing the largest portion of litigation exposure from primarily legacy Countrywide issues. Moreover, the settlement significantly reduces the amount of uncertainty surrounding the financial impact, albeit at a lofty price.

With most of its litigation behind it, DBRS analysis and surveillance will be focused on the medium and longer-term impact of its efforts to generate organic revenue growth and align expenses with its business model. If Bank of America is able to improve profitability metrics while maintaining a well-managed risk profile and its sound balance sheet, there could be positive rating implications.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 10 December 2013

For additional information on this rating, please refer to the linking document under Related Research.