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