Bank of America Corp.'s (BAC) stated fourth quarter earnings to common shareholders (4Q'13) of $3.2 billion improved from $2.2 billion in the sequential quarter and $367 million in the year-ago quarter. Fitch Ratings notes that earnings benefited from a large $1.2 billion reserve release in 4Q'13, just modestly down from the $1.4 billion release in the sequential quarter. Fitch notes that reserve releases of this size over the last two quarters are very large, and given that credit quality is likely around a cyclical trough, Fitch would expect the benefit from reserve releases to markedly decline over the course of the next year. Fitch calculated pre-tax profits, which exclude CVA/DVA adjustments and various other gains/charges, were unchanged from the prior quarter at $4.3 billion , but up substantially from the $2.1 billion in the prior year's quarter. This quarter's Fitch calculated results equate to a 0.82 percent pre-tax adjusted return on assets (ROA), unchanged from the prior quarter, but up from 0.4 percent in the year-ago quarter. These results were better than expected, but the improvement does include the large reserve release noted above. In 4Q'13, the $1.2 billion release contributed 23 basis points to the Fitch calculated ROA, compared to a contribution from reserve releases of 27 basis points in 3Q'13, indicating that core earnings improved from the sequential quarter. Part of this improvement is due to better earnings generation and part of it is due to a favorable comparison against relatively weaker 3Q'13 earnings. BAC's net interest income (NII) improved, and grew 5.07 percent from the sequential quarter driven by modestly higher income from trading assets, higher yields on securities, continued reductions in long-term debt balances and costs, as well as somewhat surprisingly still lower rates paid on core deposits. Fitch would expect to still see some benefit to NII from further reductions in higher cost long- term debt balances, though notes that more meaningful NII expansion will be predicated on loan growth. On balance, BAC's loan portfolio continues to show reductions in consumer loan balances given the continued run-off of legacy portfolios and planned reductions in consumer mortgages, with continued increases in commercial lending offsetting these reductions. Non-interest income of $10.7 billion during the quarter was good, though lower than in prior quarters. In 4Q'13 relative to 3Q'13, continued strength in wealth management amid higher equity markets and improved investment banking results were more than offset by seasonally lower trading account profits, lower equity investment income, and a generally slowing mortgage banking area. Fitch does note, however, that mortgage banking did increase from the sequential quarter due to low contra revenue impacts from representation and warranty exposures, though Fitch expects core mortgage banking results to be less than they were in the last year. BAC continues to make progress on reducing core expenses under its 'New BAC' initiatives, though this continues to be offset by litigation expense which remains a drag on overall earnings. In 4Q'13, BAC's litigation expense of $2.3 billion was $1.2 billion higher than the $1.1 billion of litigation expense in 3Q'13, and was largely related to BAC's building reservers for ongoing litigation on residential mortgage backed securities (RMBS) issues. BAC still has a number of litigation issues outstanding, the largest of which constitute getting court approval for its Bank of New York (BNY) as trustee settlement as well as pending litigation in both New York and California with the Federal Finance Housing Agency (FHFA). As these issues continue to move forward, Fitch would expect some additional litigation costs as well as potential additions to reserves over time. BAC's capital and liquidity position remain good, in Fitch's opinion, which in conjunction with continued earnings generation provide a buffer to absorb additional litigation costs noted above. As of the end of 4Q'13, BAC's global excess liquidity sources amounted to $376 billion , and its time to required funding was at 38 months. On the capital front, BAC's Tier 1 common capital ratio (CET1) was 11.19 percent, up from 11.08 percent in the sequential quarter, and its fully phased in Basel III CET1 ratio under the advanced approach was 9.96 percent, up from 9.94 percent in the sequential quarter. Additional information is available at fitchratings.com . ((Comments on this story may be sent to email@example.com ))
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