All the long-term and short-term ratings of Bank of America BAC, and long-term ratings and assessments of BofA’s primary banking subsidiary, Bank of America, N.A. (BANA), have been upgraded by Moody's Investors Service, the rating arm of Moody's Corporation MCO, concluding the review for upgrade, initiated in December 2018. However, the rating firm’s outlook for the bank has been affirmed at “stable”.
The bank’s senior debt has been upgraded to A2 from A3. BofA’s short-term deposit rating has been upped to Prime-1 from Prime-2.
Notably, long-term deposit ratings of BANA have been upgraded to Aa2 from Aa3 and BCA to a3 from baa1. Further, counterparty risk rating has been upped to Aa2 from Aa3. Notably, Moody’s affirmed the Prime-1 short-term ratings of BANA and its rated branches.
What’s Driving this Upgrade?
Moody’s had upgraded BofA’s ratings in December 2017. Since then, the bank has made significant progress in sustaining and further improving profitability.
The recent upgrade reflects BofA’s conservative risk appetite, lowered dependence of capital markets-related businesses and stable capital ratios. Further, 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. Additionally, 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. All these factors have contributed to the upgrade.
Per Moody's, BofA’s operating expenses are anticipated to remain flat, over the next two years, despite continued investments in technology and branch-expansion efforts. The rating agency believes this will further help the company sustain improved profitability.
Moreover, BofA’s conservative risk appetite compared with many of its peers has been maintained at high, along with strengthening of its earnings profile. Additionally, the rating agency believes such profile to be sustained despite some rare earnings pressures. However, the bank's more conservative credit risk and market risk profile can be partially mitigated due to its elevated interest rate sensitivity as compared with its peers, per the rating agency.
Moody’s believes 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).
Therefore, BofA’s ratio of tangible common equity to risk-weighted assets is likely to shrink 80 basis points, over the next two years, due to a number of factors, including asset growth, the Federal Reserve stress tests and the final outcome of the central bank’s planned stress capital buffer.
Per Moody’s, BofA’s ratings outlook could be upgraded on sustained decline in its interest rate sensitivity while maintaining profitability, 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.
Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
Enterprise Financial Services Corporation EFSC has been witnessing upward estimate revisions for the last 60 days. It currently sports a Zacks Rank of 1.
M&T Bank MTB has been witnessing upward estimate revisions for the last 60 days. It currently holds a Zacks Rank of 2 (Buy).
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