DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Bank of America Corporation (BAC or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Bank of America, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.
KEY RATING CONSIDERATIONS
BAC’s ratings reflect the substantial scale and diversity of its franchise, sound financial performance, and strong balance sheet with ample levels of liquidity and capital. Furthermore, BAC is well-positioned for future growth opportunities given its leading positioning across its diverse businesses. We view BAC’s earnings as highly diversified and well-balanced between net interest and non-interest income sources, which provides some offsets in the current highly-challenging interest rate environment.
The ratings and Stable trend also consider the considerably more challenging operating environment and the expected further weakening of credit fundamentals. We view BAC as taking the appropriate precautions with regard to riskier lending and extensions of credit, while acknowledging the underlying risks and interconnectedness of the credit markets. Furthermore, the unprecedented economic disruption caused by the Coronavirus Disease (COVID-19) pandemic, and related extraordinary support measures implemented to mitigate the fallout, have been factored into our ratings assessment. We will continue to monitor this developing situation and its impact on BAC’s overall credit profile.
Given the current operating environment, an upgrade of ratings in the near-term is unlikely. However, if BAC continues to demonstrate franchise momentum, while achieving positive operating leverage and maintaining a similar risk profile, the ratings would be upgraded. Conversely, a sustained deterioration of earnings or weakening of balance sheet fundamentals would drive a ratings downgrade. Any indications of meaningful franchise impairment due to risk management deficiencies or reputational issues would result in a ratings downgrade.
The ratings are underpinned by the Company’s highly-diverse business mix that includes consumer and wholesale banking services, wealth management and capital markets businesses, which all contribute to BAC’s overall franchise strength. The Company has the largest U.S. retail deposit market share, as well as top tier market positions in mortgage lending and servicing, small and middle market business lending, credit cards, and commercial banking. Additionally, BAC maintains strong positioning in investment banking and sales and trading, while operating one of the largest wealth management businesses globally. Furthermore, DBRS Morningstar sees the Company’s scalable business model and innovative mobile/digital capabilities as providing support for continued wallet share gains. BAC’s scale, market positions and diversification provide significant versatility, allowing the Company to leverage its strengths in response to changing market opportunities.
Earnings remain resilient despite a substantial building of loan loss reserves with the challenging operating environment. Strong results from capital markets and mortgage banking have helped to offset headwinds in other business lines. The Company reported net income of $12.4 billion in 9M20, resulting in a return on average assets of 0.63%. While uncertainty remains with continued COVID-19-related headwinds, we see BAC as having the earnings diversity and consistency to continue to absorb any elevated provisioning or the impact of mark-to-market movements on its balance sheet.
Asset quality metrics remain sound despite an uptick in non-performing loans. Non-performing loans have increased to 0.48% of loans at the end of 3Q20, up from 0.36% at the end of 3Q19. Similarly, net-charge-offs have also increased while still remaining at a highly manageable level. NCOs for 3Q20 were 0.40%. While asset quality metrics will likely weaken further, BAC remains well positioned to absorb higher levels of losses given current reserve levels. BAC’s risk management, compliance and control functions have strong support from the top of the organization, which is important to the Company’s responsible growth strategy. While we acknowledge the risks associated with BAC’s sizable capital markets businesses, particularly on a global scale, DBRS Morningstar sees the Company as having effective risk management capabilities that allow it to make appropriate risk/reward decisions and ensuring the capital market balance sheet remains appropriately sized.
BAC’s balance sheet remains strong. The Company’s funding and liquidity profile is underpinned by its $1.7 trillion consolidated deposit base. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable, but well-managed. Long-term debt is well-laddered by maturity and the Company has the capacity to issue across markets and to a diversified investor base. Secured funding is done shorter-term, presenting some overnight funding risk, though funding for less liquid assets is typically done on a term basis. Global Liquidity Sources, including cash and highly liquid securities, averaged $859 billion in 3Q20, representing a significant 31% of total assets. The Company reported a consolidated liquidity coverage ratio (LCR) of 122%.
As of September 30, 2020, BAC’s CET1 ratio was 11.9% (standardized) and its supplementary leverage ratio (SLR) stood at 6.9%. Despite substantial balance sheet growth this year, both ratios are above last year’s level and well-above regulatory requirements. Supporting the Company’s strong capital generation is the curtailment of buybacks since March 2020 at the start of the pandemic. BAC has historically utilized stock buybacks to manage excess capital levels, relative to its internal targets.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
The Grid Summary Grades for BAC are as follows: Franchise Strength – Very Strong; Earnings Power –Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Strong.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020): https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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