In conjunction with the periodic review of 12 Global Trading and Universal Banks (GTUBs), Fitch Ratings reiterated its long and short- term Issuer Default Rating (IDRs) on Bank of America Corporation (BAC). The rating agency re-affirmed BofA’s long-term IDR at 'A' and short-term IDR at 'F1'.
As per Fitch’s rating methodology, a bank’s IDR is either its Viability Rating (VR) or its Support Rating Floor (SRF), whichever is higher. VR reflects the company’s inherent creditworthiness, while SRF reflects Fitch's view on the probability of a bank receiving sovereign support. Fitch upgraded BofA’s Viability Rating (VR) to 'a-' from 'bbb+' whereas the Support Rating (SR) was maintained at '1' and Support Rating Floor (SRF) at 'A'.
Fitch upgraded BofA’s VR in view of the significant progress made by the company in settling its legal issues in the last few quarters. BofA successfully lowered its litigation risks besides considerably enhancing its capital and liquidity position. This led to the company’s improved credit-worthiness.
Recently, in May 2013, BofA reached an agreement to settle its legal tussle with MBIA Inc. (MBI) under which BofA will pay nearly $1.6 billion in cash and return $137 million worth of MBIA’s 5.70% senior notes maturing in 2034. Earlier, in Jan 2013, the company announced a settlement worth nearly $11.6 billion with Fannie Mae to end its mortgage related problems.
Fitch believes that the settlement of the legal issues will help BofA restrict its potential litigation expenditures in the near term.
Further, under Basel III, BofA’s Tier 1 common ratio was 9.52% as of Mar 31, 2013, up from 9.25% in the previous quarter. This was also higher than Fitch’s expectations. Moreover, BofA’s global excess liquidity continues to be in excess of $370 billion. According to Fitch, the company’s Liquidity Coverage Ratio (:LCR) is expected to remain above the stipulated regulatory requirements.
Though BofA reported improved first-quarter 2013 results, its legal and other expenses led to below its peer core earnings. However, the company reported improved results in its investment banking, trading business and wealth management operations. As per Fitch, BofA is expected to gradually improve its overall earnings by focusing more on reducing litigation costs and concentrating more on core businesses.
BofA’s ratings reflect Fitch’s view that the banking major will continue to receive support from the government in case of default as it is counted among the Globally Systematically Important Financial Institutions (G-SIFIs). Moreover, the rating agency affirmed the company’s outlook at ‘Stable’.
As a part of Fitch’s review of GTUBs, long-term IDRs of Barclays PLC (BCS) and Citigroup, Inc. (C). has been affirmed at 'A'. Moreover, these companies’ outlook has been maintained at Stable.
Amid a protracted economic recovery and various regulatory issues, the news of the rating affirmation by Fitch is expected to enhance investors’ confidence in the company.
BofA currently carries a Zacks Rank #3 (Hold).
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