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Fitch Affirms Bank of America's Long-Term IDR at 'A'; Outlook Stable
December 13, 2016 / 9:59 PM / 9 months ago

Fitch Affirms Bank of America's Long-Term IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 13 (Fitch) Fitch Ratings has affirmed Bank of America's (BAC's) Long-Term and Short-Term Issuer Default Ratings (IDR) at 'A'/'F1', respectively. The Rating Outlook is Stable. The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs). KEY RATING DRIVERS IDRs, VR, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING Fitch's affirmation of BAC's ratings with a Stable Outlook are reflective of the company's slowly improving earnings profile, a strong liquidity position and satisfactory capital ratios. In addition Fitch has assigned Derivative Counterparty Ratings (DCRs) to Bank of America and to Bank of America, N.A., Merrill Lynch International Bank Designated Activity Company (MLIBDAC), Bank of America Merrill Lynch International Ltd, and Merrill Lynch International as the entities have material derivatives activities as part of its roll out of DCRs to significant derivative counterparties in Western Europe and the U.S. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The DCR of each entity is equalized with each entity's long-term IDR. While the revenue and market environment remains challenging for BAC and its peers, Fitch continues to believe that BAC's core franchises will exhibit stronger earnings, aided by continued cost reductions. The bank is focused on simplification and greater use of technology to gain efficiencies among other initiatives. While BAC operates a number of strong businesses such as Global Wealth and Investment Management, Global Banking, and Global Markets, Fitch believes sustained improvement in the company's highly scalable good Consumer Banking operations could help to significantly boost overall returns. As measured by both revenue and earnings contribution, consumer banking remains BAC's largest business segment. Additionally, Fitch continues to expect BAC to continue to optimize its overall branch network through branch closings, reformatted branches, and corresponding headcount reductions across its branch banking platform. To the extent that management is able to realize efficiencies from the efforts noted above, Fitch believes that BAC's overall efficiency ratio could drop to the mid-to-high 60% range over the medium-term time horizon. Should this be consistently reached, this could lead to low double digit returns on equity, which would narrow the gap between BAC's earnings and that of its peers. Potentially giving a further boost to the company's earnings performance is the potential for short-term interest rates to rise more meaningfully. While the first 25 basis point rise in interest rates in late 2015 had a muted impact on the company's results, another 25 basis point increase this December could be incrementally more meaningful. What's more, should short-term interest rates reach 100 basis points or higher over a medium-term time horizon, BAC may benefit from a stronger growth in net interest income (NII) than some peers given BAC's proportionately larger retail deposit base. For example, a 100 basis point instantaneous parallel increase in interest rates would result in an additional $5.3 billion of NII over the next 12 months as of Sept. 30, which represents 33% of 2016 annualized net income. While there will be some impact on accumulated other comprehensive income (AOCI) and therefore capital from AOCI, Fitch believes this will be more than offset by higher earnings. BAC's liquidity position continues to be good and supported by its very strong retail deposit base. Total deposits as of 3Q16 were $1.2 trillion, or 64% of total liabilities. This is a key advantage for the company relative to some peers, and is supportive of today's actions. BAC's capital position remains satisfactory for the company's rating level, though it is below that of some of the other institutions covered in this peer review. As of the end of the third quarter of 2016 (3Q16), BAC's pro forma fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches (BAC's binding constraint) was 10.9%, up from 10.5% in the second quarter of 2016. BAC's Fitch Core Capital Ratio as of 3Q16 was 10.3%. This ratio is below the averages of peer institutions, though it does incorporate a significant component of operational risk weighted assets (RWA) in the denominator of the calculation, which does add some conservatism to the ratio. Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR), which as of 3Q16 was 7.1% at the parent company (5% requirement) and 7.5% (6% requirement) at its main bank subsidiary, Bank of America, N.A. (BANA) DERIVATIVE COUNTERPARTY RATING Fitch has assigned a derivative counterparty rating (DCR) to BAC's parent company as the entity has material derivatives activities. The DCR of the parent company is equalized with the long-term IDR. Fitch has also assigned DCRs to Bank of America and to Bank of America, N.A., Merrill Lynch International Bank Designated Activity Company (MLIBDAC), Bank of America Merrill Lynch International Ltd, and Merrill Lynch International as the entities have material derivatives activities. SUBSIDIARY AND AFFILIATED COMPANY The VRs remain equalized between BAC and its material operating subsidiaries. The common VR of BAC and its operating companies reflects the correlated performance, or failure rate between the BAC and these subsidiaries. However, the Long-Term IDRs for the material U.S. operating entities are rated one notch higher than BACs Long-Term IDR to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of total loss absorbing capacity (TLAC) requirements for U.S. global systemically important banks (G-SIBs), and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. Additionally, The 'F1' Short-Term IDRs of BAC's bank subsidiaries are at the lower of two potential Short-Term IDRs, mapping to an 'A' Long-Term IDR on Fitch's rating scale to reflect a greater reliance on wholesale funding than some smaller institutions. BAC's and its non-bank operating companies Short-Term IDRs at 'F1' reflect Fitch's view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity. The MBNA Limited subsidiary is one notch below the IDR of BAC, as Fitch views it as a strategically important subsidiary to the overall franchise. MATERIAL INTERNATIONAL SUBSIDIARIES Merrill Lynch International (MLI) and Bank of America Merrill Lynch International Limited (BAMLI) are wholly owned subsidiaries of BAC whose IDRs and debt ratings are aligned with BHC's because of their core strategic role in and integration into the BHC group. Fitch revised the entities Positive Outlooks to Stable since further clarity on host country internal TLAC proposals continues to be delayed. At this time, it remains unclear whether the IDRs will benefit from sufficient junior debt buffers at these entities. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF for BAC reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BAC becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support. BAC's international entities have a support rating of '1', which is reflective of Fitch's view of institutional support for the entities. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by BAC are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. BAC's subordinated debt is one notch down from BAC's VR, its preferred stock is five notches from the VR, which encompasses two notches for non-performance and three notches for loss severity, and BAC's trust preferred stock is four notches from the VR, encompassing two notches for non-performance and two notches for loss severity. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by BAC reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors of BAC. DEPOSIT RATINGS Deposit ratings are one notch higher than senior debt ratings reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. BAC's international subsidiaries' deposit ratings are at the same level as their senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference. RATING SENSITIVITIES VR, IDRs, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING Fitch sees limited downside to BAC's ratings and notes that the company's ratings are likely near the lower end of their potential range. Further upside to BAC's VR would likely be predicated on continued earnings performance where BAC's returns consistently exceed those of peers averages over an extended period. This would likely require BAC to sustainably improve its efficiency ratio to the high 50's through continued cost reduction initiatives, the realization of revenue growth opportunities, and higher short-term interest rates noted above. This may also cause management to incrementally optimize its business mix by focusing on less capital intensive businesses that carry higher returns such as wealth and asset management. Fitch believes that BAC's management should be able to execute on its strategy and close the earnings gap relative to peer institutions while maintaining healthy capital and liquidity levels. However, should management be unable to achieve better profitability over a longer-term time horizon, it is likely that ratings would remain at current levels. Downside risks to ratings, while not expected, include any remaining litigation exposures or other unforeseen charges that result in a significant net earnings loss, or if the company's Fitch Core Capital, regulatory or tangible capital ratios begin to meaningfully decline over a multi-quarter period. Additionally, Fitch expects some credit deterioration across BAC's credit portfolio given the industry's current credit metrics. Fitch continues to believe that this eventual credit deterioration will be absorbed within the context of the company's current earnings performance. However, if BAC's overall credit quality materially deteriorates beyond peer results in consecutive quarters of net loss, or the company experiences a severe and unexpected risk management failure, this could also negatively impact the VR. DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' long-term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUBSIDIARY AND AFFILIATED COMPANY All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Thus subsidiary ratings would be sensitive to any change in BAC's VR. MATERIAL INTERNATIONAL SUBSIDIARIES With the Rating Outlook revision to Stable, MLI and BAMLI ratings are sensitive to the same factors that might drive a change in BAC's VR. MLI and BAMLI ratings are sensitive to the same factors that might drive a change in BAC's IDRs. SUPPORT RATING AND SUPPORT RATING FLOOR Support ratings would be sensitive to any change in Fitch's view of support. However, since support ratings were downgraded in May 2015, there is unlikely to be any change to support ratings. BAC's international entities Support Rating of '1' is sensitive to any change in Fitch's views of potential institutional support for this entity. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid ratings are primarily sensitive to any change in BAC's VR. DEPOSIT RATINGS BAC's deposit ratings are sensitive to any change in the IDRs, which are sensitive to any change in the VRs, as the IDR receives a one-notch uplift from the VR. Thus, deposit ratings are ultimately sensitive to any change in the VR. Fitch has affirmed the following ratings with Stable Rating Outlooks: Bank of America Corporation --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'; --Long-Term market linked securities at 'A emr'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Viability Rating at 'a'; --Preferred stock at 'BB+''; --Support at '5'; --Support floor at 'NF'. Bank of America N.A. --Long-Term IDR at 'A+'; Outlook Stable; --Long-Term senior debt at 'A+'; --Long-Term subordinated debt at 'A-'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Long-Term deposit rating at 'AA-'; --Short-Term deposits at 'F1+'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'. Bank of America California, National Association --Long-Term IDR at 'A+'; Outlook Stable; --Short-Term IDR at 'F1'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'. Merrill Lynch & Co., Inc. --Long-Term senior debt at 'A'; --Long-Term market linked notes at 'A emr'; --Long-Term subordinated debt at 'A-'; --Short-Term debt at 'F1'; Merrill Lynch, Pierce, Fenner & Smith, Inc. --Long-Term IDR at 'A+'; Outlook Stable; --Short-Term IDR at 'F1'. BofA Canada Bank --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'; --Short-Term IDR at 'F1'. MBNA Limited --Long-Term IDR at 'A-'; Outlook Stable; --Short-Term IDR at 'F1' --Support at '1'. BofA Finance, LLC --Long-Term senior debt at 'A' Merrill Lynch International Bank Designated Activity Company --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch B.V. --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Long-Term market linked securities at 'A emr'; --Support at '1'. Merrill Lynch & Co., Canada Ltd. --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'. BAC Canada Finance --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch Japan Finance GK. --Long-Term IDR at 'A'; Outlook Stable; --Long-Term senior debt at 'A'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Support at '1'. Merrill Lynch Japan Securities Co., Ltd. --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1'; --Support at '1'. Merrill Lynch S.A. --Long-Term market linked securities at 'A emr'. Countrywide Financial Corp. --Long-Term senior debt at 'A'. Countrywide Home Loans, Inc. --Long-Term senior debt at 'A'. FleetBoston Financial Corp --Long-Term subordinated debt at 'A-'. LaSalle Funding LLC --Long-Term senior debt at 'A'. MBNA Corp. --Long-Term subordinated debt at 'A-'. --Short-Term debt at 'F1'. NationsBank Corp --Long-Term senior debt at 'A'; --Long-Term subordinated debt at 'A-'. BAC Capital Trust VI-VII BAC Capital Trust XI - XV --Trust preferred securities at 'BBB-'. BAC AAH Capital Funding LLC I - VII BAC AAH Capital Funding LLC IX - XIII --Trust preferred securities at 'BBB-'. BankAmerica Capital III BankBoston Capital Trust III-IV Countrywide Capital III, V Fleet Capital Trust V MBNA Capital B NB Capital Trust III --Trust preferred securities at 'BBB-'. Merrill Lynch Capital Trust I and III --Trust preferred securities at 'BBB-'. The following ratings have been affirmed and the Outlook has been revised to Stable: Bank of America Merrill Lynch International Limited --Long-Term IDR at 'A'; Outlook to Stable from Positive; --Short-Term IDR at 'F1'. Merrill Lynch International --Long-Term IDR at 'A'; Outlook to Stable from Positive; --Short-Term IDR at 'F1'; --Support at '1'. Fitch has assigned the following ratings: Bank of America Corporation Merrill Lynch International Bank Designated Activity Company Bank of America Merrill Lynch International Limited Merrill Lynch International --Derivative Counterparty Rating 'A(dcr)'. 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