Rating Action: Moody's changes outlook on Bank of America to positive, affirms ratings
Global Credit Research - 24 Jan 2017
New York, January 24, 2017 -- Moody's Investors Service has changed to positive from stable the ratings outlook for 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' ratings, including the parent holding company's Baa1 senior debt rating and BANA's A1 long-term deposit, issuer and senior debt ratings, Prime-1 short-term deposit and senior debt ratings, baseline credit assessment of baa2 and counterparty risk assessment of A1(cr)/P-1(cr).
RATINGS RATIONALE
The change in outlook to positive from stable is based on Moody's view that there is an increased likelihood that Bank of America's profitability will strengthen on a sustainable basis over the next twelve to eighteen months, while the bank continues to adhere to its conservative risk profile, lowering its earnings volatility. If achieved, this would strengthen the bank's credit profile and could lead to a ratings upgrade.
The ratings affirmation reflects Moody's view that Bank of America's current credit profile remains constrained by its modest profitability, its low risk-based capital ratios relative to peers, and the risks posed to creditors by the inherent volatility, risk opacity, and confidence sensitive customer base of the bank's sizeable global capital markets business. These challenges are balanced by the bank's more modest reliance on wholesale funding relative to peers and its robust liquidity profile.
In 2016 Bank of America announced further cost savings to be realized over the next two years, and during the second half of the year the bank demonstrated progress against this target. In light of the bank's success over the past few years in achieving most of its cost reduction targets, Moody's believes there is a high likelihood that this latest target will also be achieved, boosting the bank's profitability.
In addition, Moody's expects that higher interest rates could provide an additional boost to the bank's earnings given the bank's more asset sensitive interest rate profile relative to peers. In this regard the bank recently disclosed that it expects net interest income to increase by approximately $0.6 billion in the first quarter of 2017, up 6% from the fourth quarter of 2016, due to the increase in interest rates that took place towards the end of 2016. Moody's expects interest rates to rise further over the next year, which could boost the bank's profitability based on the bank's disclosed interest rate sensitivity. However, the rating agency noted, this benefit may not be sustainable if increased competition for deposits forces the bank to raise interest rates paid on deposits more than it anticipates.
A realization of the bank's latest cost targets, combined with an increase in net interest income from higher interest rates, if achieved and sustained, should improve the bank's operating leverage and raise its profitability on a sustainable basis, strengthening the bank's credit profile.
An increase in profitability will also increase Bank of America's internal capital generation. However, Moody's expects that much of this increased capital will be returned to shareholders, although this can only be done if the bank continues to pass the Federal Reserve's annual stress test and receives approval for increased share buybacks and/or dividends. Subject to the receipt of such approvals, Bank of America's management has targeted steadily increasing returns of capital to shareholders. The rating agency believes the bank's shareholders expect this, and therefore Moody's expects management to steadily raise the bank's payout ratio toward a level closer to that of its peers. In addition, higher long-term interest rates will likely result in additional fair value marks on securities held available for sale, negatively affecting the bank's capital ratios as they did in the fourth quarter of 2016. And Moody's expects that continued loan and deposit growth are likely to result in modest increases in the bank's balance sheet and risk-weighted assets. As a result, despite the increased likelihood of improved profitability, Moody's does not expect significant further improvements to the bank's capital ratios.
The positive outlook also reflects Moody's expectation that BAC will continue to adhere to the more conservative risk profile it has adopted since the financial crisis. Important evidence of this has been the bank's relatively strong performance under the Federal Reserve's Dodd-Frank Act Stress Test (DFAST), where in 2016 the maximum decline in the bank's CET1 capital ratio under the severely adverse scenario was the smallest of any of its largest US peers. The bank's more conservative risk profile has also been demonstrated by slower loan growth than at many of its peers, at a rate more in line with nominal GDP growth, as well as continued reductions in VaR and market risk-weighted assets, although this is a trend also found at many of BAC's peers.
Moody's believes that continued adherence by the bank to a more conservative risk profile should sustainably reduce the bank's earnings volatility, which until recently has been elevated compared to similarly rated peers due to sizeable credit and legal costs incurred by the bank during and following the financial crisis. If achieved, this would also strengthen the bank's credit profile.
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 on a Moody's-adjusted basis without increasing its risk profile or reducing its liquidity or capital ratios. A key component of this will be continued outperformance under the Fed's DFAST stress tests relative to peers, reduced earnings volatility, and the absence of major litigation or other sizeable operational risk charges or control failures.
BAC's ratings could be downgraded if the bank experiences a significant deterioration in its capital or liquidity levels or demonstrates a marked increase in its risk appetite. The ratings could also be downgraded were the bank to experience a major litigation or other sizeable operational risk charge or control failure.
The principal methodology used in these ratings was "Banks" published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
David Fanger
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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