Fitch: Improved Markets Results Drive Bank of America's Better 3Q16 Earnings

CHICAGO--()--Bank of America's (BAC) third quarter 2016 (3Q16) earnings improved relative to both the sequential and year-ago periods due to improvements across all of its businesses but particularly in the Global Markets businesses, according to Fitch Ratings.

BAC's overall return on average assets (ROA) was 0.90%, up 2 basis points (bps) from the sequential quarter and 6 bps from the year-ago quarter. The company's return on average common equity (ROE) in 3Q16 was 7.27%, which is just slightly lower than the sequential quarter result of 7.40%, but up from the year-ago quarter's result of 7.16%. Given the large amount of goodwill on BAC's balance sheet from legacy acquisitions, on a tangible basis BAC's ROE in 3Q16 was 10.28%.

The major driver of BAC's better operating performance was improved results in the company's Global Markets segment. Sales and Trading (ex. DVA) revenue in the company's Fixed Income Currency and Commodities (FICC) businesses increased 5.81% relative to the sequential quarter and 38.91% relative to the year ago. This significant improvement was due to good performance in mortgages, rates, and client financings.

Performance in the Equities business was more challenging with revenue down 11.60% from the sequential quarter and 16.81% from the year-ago quarter due to low levels of client activity in both cash equities and derivatives. This is consistent with equities performance seen at other large banks.

Given the FICC's proportionately larger revenue contribution, it more than offset the challenges in the Equities business this quarter. While Fitch views this improvement favorably, it also notes that FICC has been one of the more variable business segments for BAC as well as others in the industry over the last year, given its earnings volatility.

BAC's Global Banking businesses also enjoyed improved results this quarter due largely to improved debt and equity issuance fees. While issuance levels were relatively subdued in the first part of 2016, they increased during this quarter, particularly in investment grade debt issuance.

BAC's largest business segment measured by both revenue and net income remains its scalable consumer business. While revenue in this segment was only up 2.22% from the sequential quarter and essentially flat from the year-ago quarter, net income was up 8.11% from the sequential quarter and 3.19% from the year ago quarter. This was driven by BAC's continued efforts to drive down costs and improve efficiencies.

BAC continues to drive efficiencies across all of its businesses, and in the consumer segment this includes continuing to rationalize its branch footprint. In 3Q16, BAC lowered its branch count by 112 branches to 4,629. Fitch expects continued branch rationalization and optimization to persist in concert with the company's emphasis on digital servicing and distribution channels.

BAC's net interest yield was 2.23% in 3Q16, flat relative to the sequential quarter and up 4 bps from the year-ago quarter. It is also noteworthy that BAC switched to the contractual method for accounting for premium amortization under from FAS 91 this quarter. This changed the way premium amortization on its bond portfolio was calculated from one based on estimated principal prepayments assumptions to one based on a constant effective yield adjusted for actual prepayment experience.

Overall credit performance for BAC continues to remain good. Overall net charge offs (NCOs) were 0.40% in 3Q16, down from 0.44% in the sequential quarter and 0.43% in the year-ago quarter. This sequential decline was due to lower losses in BAC's residential real estate portfolio and consumer credit card portfolio as well as lower energy related losses.

Given the lower loss levels, BAC's overall provision expense was $850 million during the quarter, reflecting a $38 million reserve release. The overall allowance now stands at $11.7 billion, or 1.3% of total loans.

There was a $300 million increase in non-performing loans in BAC's commercial lending due to a borrower in the metals and mining group as well as a borrower in the energy lending business. Nevertheless overall non-performing loan levels remain modest within the context of BAC's overall loan portfolio.

Fitch continues to believe that overall credit performance for BAC as well as the rest of the industry remains near cyclical lows, and that there is likely to be some reversion in credit costs over the next couple of years.

In Fitch's view, BAC's liquidity position remains sound with total deposits of $1.23 trillion and a Time to Required Funding (debt coverage at parent) of 38 months.

BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio improved under the advanced approaches to 10.9%. Given that the advanced approaches ratio is lower than standardized, it remains BAC's binding constraint.

While this CET1 ratio is below the average of some peer institutions, the denominator of the ratio does include a sizeable component of operational risk weighted assets (RWA).

Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company. The bank level SLR is at 7.5%, well above the 6% minimum, and 7.1% at the parent company, well above the 5% requirement.

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Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Julie Solar
Senior Director
+1-312-368-5472
or
Media Relations
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com