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Fitch: Bank of America's 2Q13 Earnings Helped by Reserve Releases
July 17, 2013 / 5:27 PM / 4 years ago

Fitch: Bank of America's 2Q13 Earnings Helped by Reserve Releases

(The following statement was released by the rating agency) NEW YORK, July 17 (Fitch) Bank of America (BAC) reported improving results in the second quarter of 2013 (2Q13), according to Fitch Ratings. BAC's stated net income was $4.01 billion, up from $1.48 billion in the sequential quarter and $2.46 billion in the year-ago quarter. However, 2Q13 earnings benefited from a reserve release of $0.9 billion due to improving asset quality trends as well as higher home prices during the quarter. Similarly, Fitch calculated that pre-tax profits, which exclude DVA adjustments and other various gains/charges, increased to $5.0 billion in 2Q13, up from $2.2 billion in the sequential quarter and $2.8 billion in the year-ago quarter. This quarter's results equated to a Fitch calculated 0.94% adjusted return on assets (ROA), which is a fairly clean quarter for BAC and potentially indicative of future core earnings power. The $0.9 billion reserve release added 17 basis points to the Fitch calculated ROA, which is a significant boost to earnings. Additionally, should current trends in asset quality run-rates and broad home price appreciation continue over the next several months, further reserve releases are likely over the near term. Despite this reserve release, BAC's core adjusted ROA still improved substantially in 2Q13, but it remains well below the average of the top U.S. banks that have reported to date. Fitch expects BAC's level of operating performance to lag that of its peers over the near- to intermediate-term time, but the gap continues to close. BAC's revenue was largely stable as a modest decline in net interest revenue was offset by strong performance in wealth and investment management amid higher equity markets and still reasonably strong mortgage banking income due to a preponderance of refinancings. Fitch would expect mortgage banking to decline over the course of the remainder of the year amid refinancing burnout, higher mortgage rates, as well as BAC's relatively smaller proportion of the purchase driven market for new mortgages. Fitch would also note that revenue benefited from $457 million of securities gains on the quarter. The bigger impact to BAC's improved earnings performance was on the expense side, as expenses declined $3.48 billion during the quarter, as the company's 'New BAC' initiative continues to drive savings. In 2Q13 this was driven by lower litigation costs as well as lower personnel some of which related to retirement eligible compensation costs and occupancy costs as BAC continues to rationalize its branch network. BAC's capital and liquidity positions continue to remain solid. BAC's Tier 1 common equity ratio improved to 10.83% in 2Q13, up from 10.49% in the sequential quarter, and under Basel 3 rules BAC's Tier 1 common ratio increased to 9.60% up from 9.52% in the sequential quarter. The impact that higher rates had on accumulated other comprehensive income (AOCI) during the quarter was more than offset by improvements in risk-weighted assets (RWA) from improved credit quality as well as the growth in earnings. On the liquidity front, BAC continues to benefit from strong deposit funding, which has in part allowed it to continue to reduce its long-term debt outstanding which declined to $262 billion in 2Q13, down from $280 billion in the sequential quarter. Additionally, BAC's global excess liquidity remains strong, with its 'time to required funding' for the unsecured obligations of the holding company and obligations of BAC and Merrill Lynch & Co at 32 months, comfortably above the Fitch viewed standard 24 month coverage metric. 2Q13 was relatively quiet on the litigation/settlement front for BAC, which is due in large part to significant efforts made earlier in the year to reduce litigation issues. However, the company is still working to get court approval for its $8.5 billion Bank of New York Mellon as Trustee settlement related to private label residential mortgage backed securitizations for representation and warranty claims. Fitch believes that if the settlement is not approved and then over time the potential liability for this issue increased such that BAC was forced to increase reserves, the increased liability would be absorbable within the context of the firm's improving earnings and strong capital ratios, despite the significant risk from this issue. This view incorporates the assumption that the duration of the ultimate resolution would likely extend out for some time, allowing BAC to further build its capital and reserves for these exposures. Contact: Joseph Scott Senior Director +1-212-908-1624 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Justin Fuller, CFA Director +1-312-368-2057 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. 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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