TEXT-Fitch comments on Bank of America

Thu Apr 19, 2012 5:44pm EDT

April 19 - Bank of America (BAC) reported first quarter 2012 (1Q'12) net income of $653 million, down from $2.0 billion in 4Q'11, according to Fitch Ratings. Notably, each quarter was impacted by spreads on BAC's debt tightening during 1Q'12, after having widened in 4Q'11. The impact to 1Q'12 results was a pre-tax negative valuation adjustment of $4.8 billion. Underlying this adjustment Fitch views BAC's businesses to be improving and performing reasonably well, particularly compared to the sequential quarter. Pre-tax operating profits as calculated by Fitch increased sharply to $3 billion versus negative $0.7 billion in 4Q'11. Operating profitability, as measured by the pre-tax operating return on assets (ROA), reached 0.5%. This performance remained significantly below the average of the top six U.S. banks. These figures exclude DVA adjustments and various other gains/charges, The largest boost to BAC's 1Q'12 earnings came from its global markets business which had a significant increase in trading account profits due to improved customer flows in fixed income trading as well as modestly higher investment banking income. Additionally, mortgage banking income remained good thanks to higher production levels partially offset by lower servicing income and an additional $282 million of representation and warranty provisioning. Fitch expects both global markets and mortgage banking sources of revenue to remain volatile and largely dependent on market and economic conditions. BAC's net interest yield modestly ticked up to 2.51% in 1Q'12 from 2.45% in 4Q11, which was impacted from BAC's modestly higher average asset yields while holding average interest costs relatively steady from the sequential quarter. Fitch notes that this yield is lower than some of BAC's peers. Non-performing assets ticked up due almost exclusively to industrywide regulatory guidance on non-accrual loan policies for junior lien consumer real estate loans when the first lien mortgage becomes 90 days past due. As a result, BAC reclassified $1.9 billion of home equity loans to non-performing status. Even though most other loan categories exhibited improvements in non-performing loans, Fitch notes that this reclassification unfavorably impacted asset quality ratios. BAC estimates that its net exposure to European countries: Greece, Ireland, Italy, Portugal, and Spain were $9.8 billion at March 31, 2012. As BAC's total loan portfolio has shrunk from both the sequential and year-ago quarters, this combined with modest profitability, and other reductions in risk-weighted assets has enhanced the company's regulatory capital ratios. At 1Q'12, BAC's Tier 1 common ratio improved to 10.78% from 9.86% in 4Q'11 and 8.64% in 1Q'11. Fitch views this improvement in capital ratios favorably.