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"
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.