Jan 17 - Standard & Poor's Ratings Services today said its ratings on Bank of America Corp. (BofA) are not affected by the company's relatively weak fourth-quarter earnings, considering current operating conditions. BofA posted Standard & Poor's adjusted pretax loss of $0.8 billion, compared with profits of $3.2 billion in third-quarter 2012 and $486 million in fourth-quarter 2011. Earnings were impacted by a $3 billion representations and warranties charge from a settlement with Fannie Mae, which reduces the bank's exposure to putback requests. In our view, remaining exposures to private-label requests, pending settlements, and other legal risk will continue to weigh on results. Net interest income dropped versus the prior year but improved sequentially. Lower funding costs as a result of lower parent company debt and growth in low-cost deposits were not enough to offset falling yields on a smaller earning asset base. In 2013, we expect net interest income to be fairly flat, as yield pressure dampens improving funding costs, while earning assets hold relatively stable. Asset quality continued to improve across nearly all major loan portfolios, as net charge-offs and nonperforming assets declined. BofA has continued to reduce core operating costs, but various items, including legal reserves and this quarter's regulatory settlement related to foreclosure abuses, reduced the impact on earnings this quarter. Still, pursuant to the company's continuing plan to reduce the number of delinquent loans serviced, default-related servicing costs within legacy assets and servicing should decline in 2013, along with core costs, under its "New BAC" plan. Estimated Basel III Tier 1 common equity improved 28 basis points from the previous quarter to 9.25%, reflecting lower risk-weighed assets. We expect BofA's RAC ratio (8.64% as of September 2012) to remain between 8.5% and 9% during the next 12-18 months, based on our expectations of continued declines in risk-weighted assets and greater returns to shareholders following the Fed's Comprehensive Capital Analysis and Review in 2013. The outlook on BofA's is negative, reflecting the uncertainty and volatility of the company's legacy mortgage business and our expectation for continued muted earnings. We expect future costs associated with BofA's mortgage business, while declining, could be significant, though possible outcomes vary widely. We believe this issue will remain unresolved for years, which should continue to allow BofA to absorb the impact, using recurring earnings as a buffer. The outlook also reflects the outlook on the U.S. sovereign rating, given the two notches of extraordinary government support we incorporate into our issuer credit rating on BofA.
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