Fitch: Bank of America's Earnings Improve, Capital Remains Strong
CHICAGO -- April 17, 2013
Bank of America (BAC) reported improving results in the first quarter of 2013
(1Q'13), while at the same time maintaining strong capital and liquidity
positions. Fitch Ratings calculated pre-tax profits, which exclude DVA
adjustments and other various gains/charges, increased to $3.5 billion in
1Q'13, up from $2.1 billion in the sequential quarter and $3 billion in the
year-ago quarter. This quarter's results equated to a Fitch calculated 0.6%
adjusted return on assets (ROA), which is an improvement but still below those
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. Furthermore,
Fitch expects BAC's level of operating performance to continue to lag peers
over a near-to-intermediate term time horizon.
BAC's revenue benefited from higher wealth management revenue, relatively
strong investment banking and trading income, as well as an improvement in
mortgage banking income relative to the sequential quarter. Revenue in wealth
management benefited from a mix of new assets and higher client activity, and
revenue in banking and trading benefited from a strong quarter in fixed income
as well as an 8% year-over-year increase in equities primarily driven by
increased volumes. BAC's mortgage origination--done through the branch
network--increased to $24 billion, an increase of 11% from the sequential
quarter, which equated to $1.3 billion in mortgage banking revenue.
On the cost side, BAC's earnings benefited from a reduction in provision
expense to $1.7 billion, down from $2.2 billion in the sequential quarter and
$2.4 billion in the year-ago quarter as the company's credit quality, on
balance, continues to improve. Earnings also benefited from expense reductions
in the legacy assets and servicing area as well as some branch network
rationalization. Fitch expects continued cost reductions, over the
near-to-intermediate term time horizon, as the company continues to execute on
its new BAC initiatives as well legacy asset servicing costs.
Given BAC's improved earnings performance as well as improving credit quality,
on balance, the company's capital accretion continued to improve. As of 1Q'13,
the company's Tier 1 common ratio including the Market Risk Final Rule under
Basel 1 was 10.58%, up from the pro form 10.38% in the sequential quarter.
Under Basel 3 proposals BAC's Tier 1 common ratio increased to 9.42% at 1Q'13,
up from 9.25% at year-end 2012.
Additionally, Fitch views BAC's liquidity as strong, and notes that the
funding mix continues to also improve as BAC continues to opportunistically
retire higher cost long-term debt.
While BAC continues to address and move past some of its legacy litigation
issues, and to this end this quarter included a class action settlement
concerning certain residential mortgage-backed securities (RMBS) issued by
subsidiaries of Countrywide Financial Corporation for a settlement payment of
While this is a positive, Fitch notes that large litigation issues remain,
chiefly BAC getting court approval for its Bank of New York Mellon settlement
as well as resolving its issues with monoline insurers, namely MBIA. Fitch
believes that if there are adverse developments, particularly related to
monoline insuers, there could be additions to litigation reserves. Fitch does
note, however, that BAC's litigation settlements to date have largely been
manageable within the context of the company's earnings and improving and
strong capital ratios.
Additional information is available at www.fitchratings.com.
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Justin Fuller, CFA, +1-312-368-2057
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
Joseph Scott, +1-212-908-0624
Christopher D. Wolfe, +1-212-908-0771
Brian Bertsch, +1-212-908-0549
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