Fitch: Bank of America Moving Past Legacy Issues, but 4Q12 Earnings Still
CHICAGO -- January 17, 2013
Bank of America (BAC) reported stated fourth quarter 2012 (4Q'12) net income
of $732 million; however, a number of items, including debt valuation
adjustments (DVA) and other settlements, had an impact on results. Fitch
calculated pre-tax profits were $2.1 billion, which is up from a loss of $0.7
billion in the year ago quarter. Operating profitability as measured by
adjusted return on assets (ROA) was 0.4%, which Fitch views as satisfactory
given a seasonally slow fourth quarter, but still below those of peers.
Fitch notes that BAC's level of adjusted operating performance remains below
the average of the top U.S. banks that have reported to date. Fitch's
calculated figures noted above exclude DVA adjustments and various other
gains/charges. Furthermore, Fitch expects BAC's level of operating performance
to continue to lag peers over a near-to-intermediate-term time horizon.
Fourth-quarter earnings included a number of previously announced charges
which affected results that included a settlement with Fannie Mae related to
mortgage repurchase obligations as well as the Independent Foreclosure Review
agreement, among others. Fitch believes that these settlements do address a
portion of the uncertainty regarding legacy liabilities surrounding BAC. While
other litigation risks remain, Fitch acknowledges that since BAC is now
beginning to move past legacy issues, management should be able to focus more
on driving the business, which may help to narrow the earnings gap compared to
peers over time.
BAC's largest component of earnings, net interest income (NII), increased to
$10.3 billion in 4Q'12, up from $9.9 billion in 3Q'12, but down from $10.7
billion in 4Q'11. While BAC, as well as the rest of the industry, continues to
absorb declining asset yields, which have compressed the company's net
interest yield, BAC has benefited by continuing to reduce deposit costs as
well as by taking significant liability management actions to reduce its
long-term debt expense. As a result, the company's net interest yield held
relatively steady at 2.35% in 4Q'12. These actions, coupled with some loan
growth, led to the increase in NII.
BAC's loan growth occurred primarily in its global banking segment with
commercial and industrial loan growth from its large corporate as well as
middle-market segments, in addition to growth in commercial real estate
balances. As such, total ending loan balances in global banking grew 6.0%
sequentially. In addition, sales and trading revenue in this segment was
seasonally down from the sequential quarter, but up from the year ago period.
Fitch believes sales and trading revenue will improve yet remain volatile, and
over time become a smaller proportion of the company's overall revenue.
Fitch believes that BAC's capital level remains much improved, though it did
decline modestly from the sequential quarter. Total Tier 1 common capital as
of 4Q'12 amounts to $133.4 billion, down from $136.4 billion in 3Q'12 due
primarily to dividends and the pre-tax loss from the settlements noted above.
BAC's Tier 1 common ratio was 11.06%, which is still much improved from the
year ago period, and under Basel III proposals, the Tier 1 common ratio was
9.25% in 4Q'12, up from 8.97% in 3Q'12, which is better than Fitch's
As Fitch had expected, BAC's earnings and improved capital position have
allowed it to absorb the charges related to the potential litigation noted
above. Additional risks that remain include mortgage repurchase risk from
private label securitizations as well as litigation risks related to legacy
relationships with monoline insurance companies, notably MBIA. As such, Fitch
continues to expect additional charges and litigation risks to be a drag on
BAC's earnings, but much less than they had been during the last couple of
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Joseph Scott, +1-212-908-1624
One State Street Plaza
New York, NY 10004
Justin Fuller, CFA, +1-312-368-2057
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