TEXT-Fitch comments on BofA's settlement
Sept 28 - Fitch believes Bank of America Corporation's (BAC) proposed $2.43 billion settlement of the class action lawsuit related to its 2008 Merrill Lynch acquisition, announced this morning, is easily manageable in the context of the company's capital, earnings generation, and existing litigation reserves. There will be some additional litigation expense accrued in the third quarter of 2012 in light of this settlement, but we also view this as manageable. Additionally, BAC noted that its third-quarter earnings will be affected by $1.9 billion in pretax negative fair value option (FVO) and debt valuation adjustments (DVA) related to the tightening of the company's credit spreads, as well as a previously noted $800 million charge for changes in the U.K. tax rate and its effect on the company's deferred tax asset valuation. We had already anticipated that both of these charges would affect quarterly earnings. On balance, we view the class action settlement as a positive step for BAC toward resolving its multitude of legal issues. However, given that many other outstanding legal issues remain, we believe these will continue to create headwinds for the company over a near- to intermediate-term time horizon, from the perspective of both management attention and earnings generation. We expect BAC's core earnings to modestly improve but remain, potentially, below higher rated peers for the next several quarters. That said, the company's improved capital and liquidity position continues to provide a buffer for BAC to resolve and absorb additional legal settlements similar to the one announced this morning.
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