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Fitch: BAC Settlement with FHFA Reduces Litigation Risk
March 27, 2014 / 6:21 PM / 4 years ago

Fitch: BAC Settlement with FHFA Reduces Litigation Risk

(The following statement was released by the rating agency) CHICAGO, March 27 (Fitch) The settlement between Bank of America Corporation (BAC) and the Federal Housing Finance Agency (FHFA) resolves one of BAC's largest remaining litigation exposures and is a positive step toward reducing these risks, according to Fitch Ratings. There is no impact to BAC's ratings (A/F1, Outlook Negative), as positive ratings momentum is more heavily predicated on improved earnings and capital ratios. Under terms of the agreement, BAC will make cash payments to Fannie Mae (FNM) and Freddie Mac (FRE) of $6.3 billion and will purchase certain residential mortgage backed securities (RMBS), currently valued at approximately $3.2 billion, from FNM and FRE. The cash payments are in line with our FHFA litigation cash loss estimate of between $5 billion and $8 billion. However, our estimates did not contemplate additional securities repurchases as a necessary amount of consideration to complete the settlement. BAC estimates that these actions will reduce first-quarter 2014 pretax income by approximately $3.7 billion, but that its Basel III Tier 1 common equity (CET1) ratio under the standardized approach will hold steady at just over 9.0%. BAC's relatively unchanged first-quarter 2014 pro forma post-settlement capital ratio supports our view that FHFA litigation losses can be managed within the context of current earnings forecasts and existing capital ratios. However, BAC's CET1 ratio still remains below some peers. This settlement resolves a significant portion of BAC's legacy litigation exposure, so Fitch now expects the drag of litigation expenses and charges that have weighed on the company's earnings to slowly abate over the course of a year or two. That said, we believe it is still likely that BAC's core earnings performance will be below those of some peers over the near-to-medium term time horizon. Future improvement in earnings will largely be predicated on management's continued execution on efficiency initiatives, new business wins across the franchise, and some help from higher long-term interest rates. Over time, this should drive better earnings performance and thereby allow for the further internal build of capital to enhance the company's capital ratios. If BAC's core earnings relative to both the cost of capital and the performance of peers improve over the long term, and if the company further enhances its capital position, there could be some positive momentum in BAC's ratings. Contact: Justin Fuller, CFA Senior Director Financial Institutions +1-312-368-2057 Cynthia Chan Senior Director Fitch Wire Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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