DBRS, Inc. (DBRS Morningstar) upgraded the ratings of Bank of America Corporation (BAC or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS Morningstar upgraded all the ratings of its primary banking subsidiary, Bank of America, N.A. (the Bank). The trend for all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank is AA, 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 upgrade reflect its well-performing fully-scaled and highly diverse franchise. It also recognizes the Company’s strong balance sheet featuring 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 its business lines. We view BAC’s earnings as highly diversified and well-balanced between net interest and non-interest income sources, which reduces earnings volatility under various interest rate scenarios.
The ratings also incorporate 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 within industry standards.
Given the recent ratings upgrade and BAC’s high rating levels, further positive rating actions are unlikely. Over the longer-term, a sustained improvement in profitability metrics while maintaining a similar risk profile would result in a ratings upgrade. Conversely, a sustained deterioration of earnings or a significant weakening of balance sheet fundamentals would lead to a ratings downgrade. Additionally, any indications of meaningful franchise impairment due to risk management deficiencies would result in 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 2022 revenues benefitting from NIM improvement and well-contained expenses.
The Company reported net income of $20.4 billion in 9M22, down from 9M21 earnings which included significant reserve reversals. Net income for 9M22 resulted in a solid return on average assets of 0.86% and return on average common shareholders’ equity of 10.58%.
Risk Combined Building Block (BB) Assessment: (Strong)
Asset quality metrics remain sound. Non-performing assets remaining very low at 0.40% of total loans and foreclosed properties, down from 0.52% at the end of 3Q21. Additionally, net-charge-offs remain very low with NCOs for 3Q22 at 0.20%. While asset quality metrics are at unsustainably low levels and are likely to weaken in future quarters, 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)
BAC’s balance sheet remains strong. The Company’s funding and liquidity profile is underpinned by its $1.9
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 $941 billion in 3Q22, representing a significant 31% of total period-end
Capitalisation Combined Building Block (BB) Assessment: (Strong)
As of September 30, 2022, BAC’s CET1 ratio was 11.60% and its supplementary leverage ratio stood at 5.8%. Both ratios remain well-above regulatory requirements. 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/407366.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is Global Methodology for Rating Banks and Banking Organizations (June 23, 2022): https://www.dbrsmorningstar.com/research/398693/dbrs-morningstar-publishes-updated-global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/394683 (April 4, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929 (May 17, 2022) in its consideration of ESG factors.
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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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