Rating Action: Moody's reviews Bank of America long-term ratings for upgrade
Global Credit Research - 12 Sep 2017
New York, September 12, 2017 -- Moody's Investors Service has put on review for upgrade all of the long-term ratings and counterparty risk assessments of Bank of America Corporation (BAC) and its subsidiaries, including its principal bank subsidiary, Bank of America N.A. (BANA). Moody's also affirmed all Bank of America entities' short-term ratings.
RATINGS RATIONALE
The review is driven by the recent improvements to BAC's profitability and management's commitment to a conservative risk profile, both of which provide additional support for Moody's expectation that the bank's profitability will be sustained at higher and less volatile levels going forward.
Moody's noted that BAC's profitability has improved steadily over the last two years. The earnings drag from BAC's legacy mortgage servicing and litigation matters has receded, and the bank's expense-management initiatives are continuing to bear tangible results. Higher interest rates have also provided a boost to earnings at BAC, which continues to have the most asset-sensitive balance sheet among its rated US peers. The rating agency believes that sustainably stronger profitability would be positive for the bank's creditors. During the review Moody's will assess the likelihood and sustainability of further improvements in BAC's profitability, and in particular the impact of higher deposit beta's on BAC's future profitability.
The review will also consider the sustainability of the more conservative risk profile which BAC has adopted relative to many of its peers. Evidence of BAC's more conservative risk profile includes the greater resiliency of its performance under the Federal Reserve's severely adverse stress tests as well as the firm's more cautious approach to loan growth than many of its peers in the context of low nominal US GDP growth. However, notwithstanding BAC's improving profitability, Moody's believes BAC's return on equity could remain below its cost of capital for some time, generating greater shareholder pressure which could lead management to increase its risk profile going forward. This would be negative for the bank's creditors.
Moody's also noted that BAC's credit profile has been strengthened by recent improvements to its capital position. BAC's capital payouts have been more conservative than peers over the last few years, allowing the firm to build capital. However, Moody's expects BAC's payouts to shareholders to increase going forward, subject to Federal Reserve approval. Higher payouts could result in some deterioration in BAC's capital position. The review will consider the bank's capital management plans in order to assess the impact on bank creditors of higher payouts in the future.
BAC's liquidity metrics remain strong, and the review incorporates Moody's expectation that they will hold steady at current levels.
WHAT COULD MOVE THE RATINGS UP/DOWN
BAC's ratings could be upgraded if the bank were to generate sustainable profitability greater than a 0.8% return on tangible assets without increasing its risk profile or reducing its liquidity or capital ratios materially. A key component of this will be maintenance of a conservative risk profile, reduced earnings volatility, as well as absence of major litigation or other sizeable operational risk charges or control failures.
Given that Bank of America's long-term ratings are currently under review for upgrade, a downgrade of the ratings is unlikely. However, upward pressure on the ratings would be reduced if the bank experiences a significant deterioration in its capital or liquidity levels relative to peers and targets, demonstrates a marked increase in its risk appetite, or experiences a major litigation or other sizeable operational risk charge or control failure.
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