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 long-term ratings at BAC and the Bank and the Short-term ratings at the Bank have been revised to Positive from 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 and Positive trend 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 ongoing franchise and revenue growth given its leading positioning across its diverse businesses and strong momentum it has shown across a number of business lines. We view BAC’s earnings as highly diversified and well-balanced between net interest and non-interest income sources, which provides offsets in various interest rate scenarios.
The ratings also consider our expectation that credit fundamentals will likely weaken from their current unsustainably low levels. However, we view BAC as having a strong risk management culture and expect any weakening of asset quality will be modest and aligned with the overall industry.
If BAC demonstrates continued franchise momentum resulting in revenue growth, while maintaining a similar risk profile, the ratings would be upgraded. Conversely, a sustained deterioration of earnings, a perceived increase in risk appetite or a weakening of balance sheet fundamentals would drive a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong
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 full banking capabilities as supportive for continued growth. BAC’s scale, market positions and diversification provide significant versatility, allowing the Company to leverage its strengths in response to changing market opportunities.
Earnings Combined Building Block (BB) Assessment: Strong / Good
Earnings are strong with 2021 earnings benefitting from significant reserves releases reflecting an improved economic outlook. Additionally, strong results from all businesses and significant balance sheet growth has helped boost the bottom line. The Company reported net income of $25.0 billion in 9M21, which doubled from 9M20 earnings, resulting in a return on average assets of 1.12% and return on average common shareholders’ equity of 12.67%.
Risk Combined Building Block (BB) Assessment: Strong
Asset quality metrics remain sound despite an uptick in non-performing loans. Non-performing loans have increased to 0.71% of loans at the end of 3Q21, up from 0.54% at the end of 3Q20. However, net-charge-offs have trended down and are likely at unsustainably low levels. Specifically, NCOs for 3Q21 were just 0.20%. We view BAC as remaining 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.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
BAC’s balance sheet remains strong. The Company’s funding and liquidity profile is underpinned by its almost $2.0 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 $1.1 trillion in 3Q21, representing a significant 36% of total period-end assets.
Capitalization Combined Building Block (BB) Assessment: Strong
As of September 30, 2021, BAC’s CET1 ratio was 11.1% (standardized) and its supplementary leverage ratio (SLR) stood at 5.6%. While down from the year earlier period, both ratios remain well-above regulatory requirements. However, with the resumption of capital management activities we expect capital levels to continue to decline. BAC has historically utilized stock buybacks to manage excess capital levels, relative to its internal targets.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/389857.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021): https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support and DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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