Fitch: Bank of America's 3Q'13 Earnings Boosted by Reserve Releases

Wed Oct 16, 2013 1:36pm EDT

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(The following statement was released by the rating agency) CHICAGO, October 16 (Fitch) Bank of America Corporation's (BAC) stated third quarter earnings of $2.5 billion declined from the sequential quarter's earnings of $4.01 billion, but increased from the year-ago quarter's earnings of $340 million. The stated earnings number was slightly better than Fitch expected as 3Q'13 earnings benefited from a reserve release of $1.4 billion, which was a $500 million increase from the $0.9 billion reserve release in the second quarter of 2013 (2Q'13), due to continued improving asset quality metrics across nearly all lending categories and higher home prices during the quarter. However, Fitch calculated pre-tax profits, which exclude Debt Valuation Adjustment (DVA) adjustments and various other gains/charges, and was significantly impacted by excluding the $0.8 billion gain on the sale of the remaining shares in China Construction Bank (CCB) this quarter, declined to $4.3 billion, down from $5.0 billion in the sequential quarter and essentially flat from the year-ago quarter of $4.4 billion. This quarter's Fitch calculated results equate to a 0.82% adjusted return on assets (ROA), which is down from 0.94% in 2Q'13 and essentially flat from 0.80% in 3Q'12. This result was slightly better than expected, but this improvement was largely generated by the reserve release noted above. The $1.4 billion reserve release contributed 27 basis points to the Fitch calculated ROA in 3Q'13 compared to the 17 basis points contributed from last quarter's $0.9 billion release, indicating other components ofcore earnings declined relative to the sequential and year-ago quarters. While Fitch expected a reserve release, and similar to the experience of other banks with large consumer operations, the size of the release for BAC this quarter masks some of the challenges that BAC -- as well as other banks -- continue to face in driving significant loan growth and consistent earnings from investment banking to help build solid and sustainable core earnings power. Given continued favorable asset quality trends as well as some moderating levels of home price appreciation, Fitch believes further reserve releases over the remainder of the year are probable, but less than the amount in 3Q'13 given the reserve level at 1.81% of total loans and leases (excluding purchase credit impaired loans). BAC's net interest income (NII) was relatively flat on a core basis compared to the sequential quarter as continued reductions in overall funding costs has continued to be offset by lower loan yields. Fitch expects it to be more challenging for BAC to meaningfully increase NII growth without a significant pick-up in asset yields as reductions in funding costs should begin to wane at some point over the course of the next year. Non-interest income benefited from continued strength in wealth management and strong equity investment income, offsetting the expected decline in mortgage banking income and investment banking and trading revenues that were lower relative to the sequential quarter and combined were slightly lower from the year-ago quarter. Fitch views favorably that BAC continues to wind down its Legacy Asset and Servicing (LAS) costs and optimized its branch network, which has resulted in continued and planned reductions in non-interest expenses. However, this was offset by $1.1 billion of litigation expense that continues to weigh on the company's overall results. Fitch notes favorably that BAC's capital and liquidity positions have improved during the quarter. BAC's Tier 1 common ratio under Basel III advanced approaches increased to 9.94% in 3Q'13, up from 9.60% in 2Q'13 and 9.52% in 1Q'13. This was primarily driven by a $6.0 billion increase in Tier 1 common capital under Basel III, as risk-weighted assets also increased by 1.2% from the sequential quarter. Fitch continues to believe that the bulk of BAC's future sustainable earnings growth will be largely predicated on a mix of loan growth and cost savings initiatives partially offset by potential additional litigation charges over a near-to-medium term time horizon given BAC's still outstanding litigation issues. Contact: Primary Analyst Justin Fuller, CFA Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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