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BofA Earnings Increase: Fitch

April 23, 2013

Bank of America reported improving results in the first quarter of 2013, while at the same time maintaining strong capital and liquidity positions.

Fitch Ratings calculated pre-tax profits, which exclude DVA adjustments and other various gains/charges, increased to $3.5 billion in 1Q'13, up from $2.1 billion in the sequential quarter and $3 billion in the year-ago quarter. This quarter's results equated to a Fitch calculated 0.6 percent adjusted return on assets (ROA), which is an improvement but still below those of peers.

Fitch notes that BAC's level of adjusted operating performance remains below the average of the top U.S. banks that have reported to date. Furthermore, Fitch expects BAC's level of operating performance to continue to lag peers over a near-to-intermediate term time horizon.

BAC's revenue benefited from higher wealth management revenue, relatively strong investment banking and trading income, as well as an improvement in mortgage banking income relative to the sequential quarter. Revenue in wealth management benefited from a mix of new assets and higher client activity, and revenue in banking and trading benefited from a strong quarter in fixed income as well as an 8 percent year-over-year increase in equities primarily driven by increased volumes. BAC's mortgage origination--done through the branch network--increased to $24 billion, an increase of 11 percent from the sequential quarter, which equated to $1.3 billion in mortgage banking revenue.

On the cost side, BAC's earnings benefited from a reduction in provision expense to $1.7 billion, down from $2.2 billion in the sequential quarter and $2.4 billion in the year-ago quarter as the company's credit quality, on balance, continues to improve. Earnings also benefited from expense reductions in the legacy assets and servicing area as well as some branch network rationalization. Fitch expects continued cost reductions, over the near-to-intermediate term time horizon, as the company continues to execute on its new BAC initiatives as well legacy asset servicing costs.

Given BAC's improved earnings performance as well as improving credit quality, on balance, the company's capital accretion continued to improve. As of 1Q'13, the company's Tier 1 common ratio including the Market Risk Final Rule under Basel 1 was 10.58 percent, up from the pro form 10.38 percent in the sequential quarter. Under Basel 3 proposals BAC's Tier 1 common ratio increased to 9.42 percent at 1Q'13, up from 9.25 percent at year-end 2012.

Additionally, Fitch views BAC's liquidity as strong, and notes that the funding mix continues to also improve as BAC continues to opportunistically retire higher cost long-term debt.

While BAC continues to address and move past some of its legacy litigation issues, and to this end this quarter included a class action settlement concerning certain residential mortgage-backed securities (RMBS) issued by subsidiaries of Countrywide Financial Corp. for a settlement payment of $500 million.

While this is a positive, Fitch notes that large litigation issues remain, chiefly BAC getting court approval for its Bank of New York Mellon settlement as well as resolving its issues with monoline insurers, namely MBIA. Fitch believes that if there are adverse developments, particularly related to monoline insuers, there could be additions to litigation reserves. Fitch does note, however, that BAC's litigation settlements to date have largely been manageable within the context of the company's earnings and improving and strong capital ratios.

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Source: Copyright Professional Services Close - Up 2013

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