January 13, 2017 / 9:59 PM / a year ago

Fitch: Bank of America's Earnings Show Improvement

(The following statement was released by the rating agency) CHICAGO, January 13 (Fitch) Bank of America's (BAC) fourth quarter 2016 (4Q16) showed some improvement, according to Fitch Ratings. Reported net income to common shareholders equity was seasonally down only 2.63% from the sequential quarter and grew 46.75% from the year-ago quarter, weaker year-ago quarter. On a full-year basis, BAC's 2016 reported net income to common shareholders equity grew to $16.2 billion, a 13.04% increase from the prior year, which includes a challenging start to the year. The improvements over the course of the year were broad-based, with particular strength in the company's Global Markets segment. Additionally, the company has continued to execute on its efficiency initiatives, which have helped drive some positive operating leverage on a year-over-year basis. These results are consistent with Fitch's long-term ratings view that BAC's management will begin to sustainably improve earnings performance closer to peer levels. If BAC is able to maintain earnings at consistently higher than current levels while preserving strong capital and liquidity, it could lead to some longer-term positive ratings momentum for the company. BAC's Global Markets segment experienced significant improvement year-over-year and across all trading businesses, though down relative to the sequential quarter, reflecting typical seasonality. Fixed Income Currency and Commodities (FICC) trading did particularly well in the quarter with the only areas of weakness in municipal finance and rates. Equities trading also improved year-over-year but not as well as FICC. BAC's overall return on average assets (ROA) was 0.85% in 4Q16 compared to 0.90% in the sequential quarter and 0.60% in the year-ago quarter. On a full year basis, the company's ROA improved to 0.82%, up from 0.73% in the prior year. The company's return on average equity (ROE) was 6.72% in 2016 relative to 6.28% in the prior year. While Fitch views these improvements positively, they remain below BAC's long-term targets. BAC's highly scalable consumer banking segment benefited from higher net interest income (NII) due to continued growth in deposit balances and therefore assets amid a flat overall net interest yield. Additionally, the segment enjoyed improved mortgage banking production amid the rally in mortgage rates in the second and third quarters of the year. However, the mortgage pipeline for BAC and other banks has declined due to increased mortgage rates. The consumer segment also exhibited good cost reductions through a mix of operational efficiency initiatives, and reductions in financial centers (branches) declined by 147 over the last quarter to 4,579 as of year-end 2016. This combined to drive the segment's efficiency ratio to 53% in 4Q16, down from 55% in the sequential quarter and 58% in the year-ago quarter. BAC's Global Wealth & Investment Management segment continued to deliver relatively flat yet still good results. The segment's revenue was essentially flat from the sequential quarter and down 2% from the year-ago quarter as higher asset management fees driven by improved equity markets were offset by lower transactional revenues. This trend may continue given the Department of Labor (DOL) rule, as BAC is eliminating transactional based retirement accounts. BAC's Global Banking segment's revenue declined as slightly higher NII was offset by lower Investment Banking (IB) fees. Within IB both advisory and equity issuance fees were lower, whereas year over year debt issuance fees were higher, but down from the prior quarter. However, Global Banking's net income improved given continued expense reductions and lower provision expense as certain energy exposures improved amid higher oil prices over the latter part of the year. Higher short-term interest rates over the course of 2017 should contribute to earnings improvement for the year. BAC indicates that it remains asset-sensitive, forecasting a 100 basis point parallel shift in the yield curve would benefit NII by $3.4 billion, or 8.1% of current annual NII, over the next 12 months. If this occurs, BAC's ROE could reach the company's long-term targets. Overall BAC's balance sheet as of 4Q16 amounted to $2,187.7 billion, which declined modestly from the sequential quarter amid lower trading assets but was up from the year-ago quarter. The company's overall loan balances increased 3% from the year-ago quarter, which includes BAC's U.K. consumer credit card portfolio of approximately $9 billion in receivables. Credit quality across the loan portfolio remains good, though Fitch believes credit costs across the industry are likely to remain at cyclical troughs. In Fitch's view, BAC's liquidity position remains sound with total deposits of $1.26 trillion and a Time to Required Funding (debt coverage at parent) of 35 months. This measurement declined from 38 months in the prior quarter due to lower asset values as a result of higher interest rates during the quarter flowing through accumulated other comprehensive income (AOCI). BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio declined slightly under the advanced approaches to 10.8% amid the AOCI impact noted above. While this CET1 ratio is below the average of some peer institutions, the denominator of the ratio does include a sizeable component of operational risk weighted assets (RWA). Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company. The bank level SLR is at 7.3%, well above the 6% minimum, and 6.9% at the parent company, well above the 5% requirement. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Julie Solar Senior Director +1-312-368-5472 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available at 'www.fitchratings.com'. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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