DBRS Confirms Bank of America at ‘A’; Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of Bank of America Corporation (BAC or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Bank of America, N.A. (the Bank). With the exception of the Bank’s short-term ratings, the trend on all other ratings have been revised to Positive from Stable. The Intrinsic Assessment (IA) for the Bank is A (high), 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.

In changing the trend to Positive, DBRS recognizes BAC’s improved financial performance and fundamentally stronger balance sheet that positions it well for future growth opportunities. DBRS also notes that the Company’s diverse businesses are contributing to consistent revenue generation despite continuing headwinds. Furthermore, BAC’s focus on responsible growth is evident in its improving asset quality metrics. As the Company has made significant progress in putting behind its legacy issues, which were once a significant distraction to management and an earnings headwind, DBRS sees the rating as migrating upward.

The ratings are underpinned by the Company’s diverse business mix that includes consumer and wholesale banking services, wealth management and capital markets businesses, which contribute to BAC’s overall franchise strength. The Company has 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. While DBRS views the Company’s core businesses as well-positioned for growth, supported by a scalable business model and mobile/digital capabilities, the ratings also consider the heightened regulatory scrutiny and enhanced capital demands that coincide with being a global systemically important bank (G-SIB).

Earnings continue to demonstrate improvement with resilient revenues and a declining expense base. BAC has been relatively consistent in generating top line revenues, averaging about $85 billion in annual net revenues over the past five years, despite the challenging operating environment. The Company continues to make progress with expense initiatives, with an efficiency ratio of 62% in 9M17, on an FTE basis. This ratio is good and has been improving over time, despite close to 40% of BAC’s revenues coming from businesses that typically have a higher cost base, such as wealth management and global markets. Importantly, the Company continues to deliver positive operating leverage and this is expected to continue with the benefit of rising rates. Moreover, returns are improving with an ROACE of 7.8% and a return on tangible common equity of 11.0% in 9M17, up from an ROACE of 6.6% and a return on tangible common equity of 9.4% a year earlier.

Given BAC’s track record of executing on its strategic initiatives, DBRS sees the Company as having a strong ability to adjust to the evolving operating environment. Risk management, compliance and control functions have strong support from the top of the organization, and this is critical to the Company’s responsible growth strategy. While DBRS acknowledges the risks associated with BAC’s sizable capital markets businesses, particularly on a global scale, DBRS sees BAC as having effective risk management capabilities that allow it to make appropriate risk/reward decisions. Asset quality metrics are strong with low levels of nonperforming loan balances and net charge offs.
BAC’s funding and liquidity profile is strong, underpinned by its $1.3 trillion consolidated deposit base. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable, but well-managed. Reflecting its high level of liquidity, Global Liquidity Sources stood at $531 billion at 3Q17, representing 23% of total assets, and an LCR of 126%.

Capitalization is also strong and much improved from pre-crisis levels with a tangible common equity ratio of 8.1% at 3Q17, up notably from 5.6% at the end of 2009. BAC reported a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches of 11.9%, and a Supplementary Leverage Ratio of 7.1% at 3Q17.

Bank of America, a diversified financial services corporation headquartered in Charlotte, NC, reported approximately $2.3 trillion in consolidated assets as of September 30, 2017.

The Grid Summary Grades for BAC are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong/Good; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

RATING DRIVERS
BAC’s continued success in enhancing its franchise by executing on its strategy, while improving returns across business segments, combined with continued progress in adjusting to evolving regulatory requirements, will likely add positive pressure to the rating. The trend could revert back to Stable if there were a reversal in progress in business positioning that was accompanied by weakening profitability trends. Substantial issues related to misconduct, litigation or operational controls could also pressure ratings, particularly if DBRS perceives that these issues have impaired BAC’s reputation or are causing damage to the core franchise.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

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

Lead Analyst: Lisa Kwasnowski, Senior Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 02 August 2017

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.