Moody's Investors Service, a rating arm of Moody's Corporation MCO, has placed the long-term and short-term ratings of Bank of America BAC under review for possible upgrade. Further, the company’s outlook of Stable has been placed under review.
Also, long-term ratings of BofA’s primary banking subsidiary, Bank of America, N.A. (“BANA”), has been put under review for similar action. Notably, Moody’s affirmed the Prime-1 short-term ratings and P-1(cr) counterparty risk assessments of BANA and its rated branches.
Why the Possible Upgrade?
Moody’s had upgraded BofA’s ratings last December. Since then, the bank has made significant progress in sustaining and further improving profitability.
BofA has been constantly generating positive operating leverage driven by managing costs, higher interest rates and retail deposit growth. Lower tax rates are also supporting the bank’s profitability. Further, the company’s profits have improved, mainly driven by notable growth in consumer banking and wealth management operations. This has lowered its dependence on investment banking and capital markets businesses.
Also, BofA projects operating expenses to remain relatively stable over the next two years despite continued investments in technology upgrades and branch expansion efforts. The rating agency believes that this will further help the company sustain improved profitability.
Moreover, BofA’s conservative risk appetite compared with many of its peers has resulted in “continued greater resiliency of its performance under the Federal Reserve's stress tests.” Moody’s believes that improved profitability has also supported the company’s enhanced capital deployment actions and sustained strong capital ratios. Moody’s expects BofA to continue increasing shareholder payouts going forward (subject to regulatory approvals).
Hence, the ratings firm will be focusing on BofA’s conservative risk appetite, lowered dependence of capital markets-related businesses and stable capital ratios while reviewing its ratings. It plans to also take into consideration the company’s future capital and funding plans as well as long-term debt.
Per Moody’s, BofA’s ratings outlook could remain Stable or could be lowered in case the company suffers significant decline in profitability, there is a marked rise in risk appetite and deterioration in capital/liquidity levels.
Ratings of Other Big Banks
Recently, Moody’s placed the long-term ratings of Citigroup C under review for upgrade. Notably, the rating agency affirmed all short-term ratings and counterparty risk assessments of the company. (Read more: Citigroup Ratings Put Under Review for Upgrade by Moody's)
Earlier, in October, Moody’s upgraded the long-term debt and deposit ratings, counterparty risk ratings and counterparty risk assessments of JPMorgan JPM. Further, the rating agency affirmed the company’s outlook at Stable.
Price Performance and Zacks Rank
Shares of BofA has lost 6.2% over the past year compared with 8% decline for the industry it belongs to.
BofA currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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