Fitch Affirms Bank of America's IDR at 'A'; Outlook Remains Negative on Support Expectations

CHICAGO--()--Fitch Ratings has affirmed Bank of America Corporation's (BAC) Long-term Issuer Default Rating (IDR) at 'A' and maintained the Rating Outlook at Negative and reflects Fitch's expectation that the probability that the bank would receive support from the U.S. government if ever required is likely to decline during the next six to nine months. At the same time, Fitch affirmed BAC's Short-Term IDR at 'F1', Viability Rating (VR) at 'a-', Support Rating (SR) at '1', and Support Rating Floor (SRF) at 'A'. A full list of rating actions, including actions on BAC's main subsidiaries and debt ratings, is at the end of this rating action commentary.

The rating actions have been taken as part of a periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. On balance, Fitch's outlook for the sector is stable. The 12 banks have continued to strengthen their balance sheets in 9M14. Capitalisation has improved materially over the past two years and liquidity remains sound. This strengthening balances continued pressure on earnings, particularly in securities businesses, and remaining material but unpredictable exposure to conduct and regulatory risks.

Fitch forecasts weak growth in the eurozone during 2015 while growth in the US and UK is expected to be somewhat stronger, which should help the GTUBs with a significant presence in these regions. Spikes in market volatility, most recently in October 2014, show that uncertainty remains over how expectations of rising interest rates in the US will affect financial markets. Our expectation is that rises in interest rates will be gradual and would follow improved prospects for the economy, which should help business volumes. Sharp and unexpected hikes in US interest rates would likely result in increased market volatility and, consequently, additional pressure on banks' earnings, although we believe that the GTUBs' risk appetite has declined.

Lower risk appetite should help the banks avoid material losses on trading positions but an adverse operating environment could result in a change of our outlook if earnings prospects suffer materially. For eurozone-focused banks, a prolonged deflationary scenario would put pressure on earnings and could result in a changed rating.

KEY RATING DRIVERS - IDRS, SENIOR DEBT, SR AND SRF

BAC's Long- and Short-term IDRs, SR and SRF reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government ('AAA'/Stable Outlook) if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though this propensity is becoming less certain. Specific to BAC, Fitch's view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, significant deposit market share and its position as a key provider of financial services to the U.S. economy. BAC's IDRs and senior debt ratings benefit from support because BAC's VR is below its SRF.

However, the momentum is gaining pace to resolve even the most complex banking groups without significantly disrupting the financial markets and without requiring state support. The Negative Outlook on BAC's Long-term IDR reflects Fitch's view that there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvency assessments.

KEY RATING SENSITIVITIES - IDRS, SENIOR DEBT, SR AND SRF

As BAC's Long-term IDR is at its SRF and Fitch does not expect an upgrade of its VR during the next six to nine months, the sensitivities of the bank's IDR's are predominantly the same as those for the SRF.

The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). A key hurdle that remains is whether sufficient contingent capital exists at the holding company to recapitalize without requiring government assistance.

Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise BAC's SR to '5' and its SRF to 'No Floor' likely during the first half of 2015.

A revision of the SRF to 'No Floor' would mean that BAC's Long-Term IDR would likely be downgraded to the level of its VR, which, as it currently stands, would mean a one-notch downgrade to 'A?'. After a revision of the SRF, the Long-term IDR and the Outlook would be sensitive to the same factors as its VR. A downgrade of the Long-term IDR would not necessarily lead to a downgrade of the Short-term IDR.

KEY RATING DRIVERS - VR

BAC's VR continues to be supported by good capital and liquidity positions. Additionally, while Fitch would note that BAC's core earnings have also begun to show some improvement, the vast majority of the company's earnings over the last few years have been absorbed by litigation settlements and costs.

To this end, over the last year BAC has reached settlements with among others the Federal Housing and Finance Administration (FHFA) and the Department of Justice (DOJ) over legacy mortgage related matters.

These sizable settlements amounted to total consideration in excess of $25 billion over the last several quarters, though some of the liability had been reserved for in prior years and some of it was non-cash in nature.

Nevertheless, the vast majority of BAC's earnings have been absorbed by these large settlements as well as continued litigation costs on other matters. Additionally, BAC also took some actions to reduce certain risk weighted assets (RWA) to support the denominator in regulatory capital ratio calculations, keeping relatively steady. BAC also raised some debt to help fund these payments.

Fitch would note that while BAC does still have a number of outstanding legal issues to still be resolved, they are all much smaller compared to the FHFA and DOJ settlements. As such, while Fitch would expect litigation costs to still be a drag on BAC's overall results, it does not expect the magnitude of settlements and litigation costs incurred in 2013 and 2014 to persist.

In Fitch's view, BAC's core earnings profile continues to exhibit improvements despite the challenging market environment and protracted low interest rate environment. Much of this improvement is the result of continued expense management initiatives.

This includes continuing to reduce expenses in the company's Legacy Assets & Servicing Group (LAS), as well as having realized significant savings from 'New BAC' initiatives, which have included streamlining processes, more effectively utilizing technology systems, optimizing some of its branch network, and reducing headcount to name a few.

Even with the savings realized to date, Fitch believes further expense management remains a key lever management can pull to drive future earnings performance. While the bulk of this is still to be realized in the LAS group, additional cost savings are likely to arise out of the company's core operations as well.

Fitch believes that to the extent that management is successful at realizing these cost savings over a medium-term time horizon, BAC's returns should improve closer to peer group averages as well as Fitch's estimate of the company's long-term cost of equity assumption of around 12%.

Fitch notes that BAC has a number of strong franchises, whose strength may be more evident without the consistent overhang of large litigation costs and settlements as well as a somewhat bloated cost structure.

KEY SENSITIVITIES - VR

As previously alluded to, longer-term positive rating momentum for the VR is predicated on a consistent improvement in overall earnings to at least levels of other G-SIFI institutions, all while maintaining ample liquidity and a good capital position.

Notwithstanding the impact of the reserve releases noted above on recent earnings performance, BAC's core earnings have also been moderately volatile on a quarterly basis given the company's large reliance on capital markets activities. Capital markets revenue, on balance, approximates one-third of overall revenue, and was comparatively weak in the third quarter of 2014 (3Q'14).

Over time, should management be able to execute on improving performance in the retail banking business as well as maintain its strong performance in wealth management, the capital markets businesses contribution to earnings could decline and therefore add some stability to overall earnings. This could be a positive rating factor over a longer-term time horizon.

It is also worth noting that some of the potential improvement in the retail banking business is also likely predicated on rising short-term interest rates whenever that occurs. BAC indicates that its interest rate risk positioning is asset sensitive, which Fitch believes is largely supported by the company's large retail deposit base, which given this composition has the potential to have a larger deposit re-pricing lag than some peer banks.

That said, Fitch also notes that both the current absolute level of interest rates and the duration of low interest rates is unprecedented by historical standards, complicating the dynamics of positioning a balance sheet for rising rates for all financial institutions, including BAC.

While not expected, should remaining litigation exposures or other unforeseen charges result in a significant net earnings loss, or if the company's regulatory or tangible capital ratios begin to meaningfully decline over a near- to intermediate- term time horizon, the VR could be downgraded. Additionally, should BAC's overall credit quality materially deteriorate over the near term, or the company experience a severe and unexpected risk management failure this could negatively impact the VR.

KEY RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

BAC's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

The ratings of long- and short-term deposits issued by BAC and its subsidiaries are primarily sensitive to any change in BAC's IDR. This means that should BAC's Long-term IDR be downgraded due to Fitch's evolving view of support discussed above, deposit ratings could be similarly impacted.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by BAC and by various issuing vehicles are all notched down from BAC's or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The ratings of subordinated debt and other hybrid capital issued by BAC and its subsidiaries are primarily sensitive to any change in BAC's VR.

KEY RATING DRIVERS AND SENSITIVITIES - HOLDING COMPANY AND OPERATING SUBSIDIARY

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. This may result in a possible downgrade of BAC's holding company rating, an upgrade of operating company ratings, or no changes to ratings if Fitch's views the long-term debt requirement assigned to BAC as providing an insufficient amount of bail-in capital at the operating company level.

KEY RATING DRIVERS & SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of BAC's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA and therefore IDRs and VRs of Bank of America, N.A. are equalised across the group. Fitch regards BAC's investment banking and broker-dealer entities such as Merrill Lynch International and Bank of America Merrill Lynch International Ltd to be core entities for BAC and thus IDRs equalized and linked to BAC.

Fitch views BAC's MBNA Limited subsidiary's ratings to be strategically important for BAC and thus IDRs of this entity are one notch lower than BAC's IDR in accordance with Fitch's rating criteria.

As the IDRs and VRs of the subsidiaries are equalised with those of BAC to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in BAC's IDRs.

To the extent that one of BAC's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from BAC's IDR.

BAC is one of the largest U.S. banks in terms of total deposits, loans, branches, mortgage originations/servicing and credit card issuance. Following its January 2009 merger with Merrill Lynch & Co., Inc., BAC also became one of the top financial institutions in wealth management and investment banking.

Fitch affirms the following ratings:

Bank of America Corporation

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+'

--Long-term market linked securities at 'A emr';\

--Senior shelf at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Viability Rating at 'a-';

--Preferred stock at 'BB'

--Support at '1';

--Support floor at 'A'.

Bank of America N.A.

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+'

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Long-term deposits at 'A+';

--Short-term deposits at 'F1';

--Viability Rating at 'a-'

--Support at '1';

--Support floor at 'A'.

Bank of America California, National Association

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1';

--Viability Rating at 'a-';

--Support at '1';

--Support floor at 'A'.

Merrill Lynch & Co., Inc.

--Long-term senior debt at 'A';

--Long-term market linked notes at 'A emr';

--Long-term subordinated debt at 'BBB+';

--Short-term debt at 'F1';

Merrill Lynch, Pierce, Fenner & Smith, Inc.

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1'.

Bank of America Merrill Lynch International Limited

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1'.

B of A Issuance B.V.

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+';

--Support at '1'.

Secured Asset Finance Company B.V.

--Senior debt at 'A'.

Secured Asset Finance Company LLC

--Senior debt at 'A'.

LaSalle Bank N.A.

LaSalle Bank Midwest N.A.

--Long-term deposits at 'A+';

--Short-term deposits at 'F1'.

Countrywide Bank FSB

--Long-term deposits at 'A+';

--Short-term deposits at 'F1';

BofA Canada Bank

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+';

--Short-term IDR at 'F1'.

MBNA Limited

--Long-term IDR at 'A-', Outlook Negative;

--Long-term senior debt at 'A-';

--Short-term IDR at 'F1'

--Support at '1'.

Merrill Lynch International

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1';

--Support at '1'.

Merrill Lynch International Bank Ltd.

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1';

--Support at '1'.

Merrill Lynch B.V.

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Long-term market linked securities at 'A emr';

--Support at '1'.

Merrill Lynch & Co., Canada Ltd.

--Short-term IDR at 'F1';

--Short-term debt at 'F1'.

BAC Canada Finance

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Short-term IDR at 'F1';

--Support at '1'.

Merrill Lynch Japan Finance GK

--Long-term IDR at 'A', Outlook Negative;

--Long-term senior debt at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Support at '1'.

Merrill Lynch Japan Securities Co., Ltd.

--Long-term IDR at 'A', Outlook Negative;

--Short-term IDR at 'F1';

--Support at '1'.

Merrill Lynch S.A.

--Long-term market linked securities at 'A emr'.

BankAmerica Corporation

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+'.

Countrywide Financial Corp.

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+'.

Countrywide Home Loans, Inc.

--Long-term senior debt at 'A';

--Long-term senior shelf unsecured rating at 'A';

FleetBoston Financial Corp

--Long-term subordinated debt at 'BBB+'.

LaSalle Funding LLC

--Long-term senior debt at 'A';

MBNA Corp.

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+';

--Short-term debt at 'F1'.

NationsBank Corp

--Long-term senior shelf debt at 'A';

--Long-term senior debt at 'A';

--Long-term subordinated debt at 'BBB+'.

NCNB, Inc.

--Long-term subordinated debt at 'BBB+'.

BAC Capital Trust VI-VIII

BAC Capital Trust XI - XV

--Trust preferred securities at 'BB+'.

BAC AAH Capital Funding LLC I - VII

BAC AAH Capital Funding LLC IX - XIII

--Trust preferred securities at 'BB+'.

BankAmerica Capital III

BankBoston Capital Trust III-IV

Barnett Capital Trust III

Countrywide Capital III, IV, V

Fleet Capital Trust V

MBNA Capital B

NB Capital Trust III

--Trust preferred securities at 'BB+'.

Merrill Lynch Preferred Capital Trust III, IV, and V

Merrill Lynch Capital Trust I, II and III

--Trust preferred securities at 'BB+'.

Fitch withdraws the following ratings:

Bank of America Georgia, N.A.

Bank of America Oregon, National Association

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Viability Rating at 'a-';

--Support at '1';

--Support floor at 'A'.

LaSalle Bank Corporation

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Viability Rating at 'a-';

--Support at '1';

--Support floor at 'A'.

Merrill Lynch Finance (Australia) Pty LTD

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

United States Trust Company N.A.

--Long-term deposits at 'A+';

--Short-term deposits at 'F1';

Additional information is available at www.fitchratings.com.

In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Rating FI Subsidiaries and Holding Companies' (January 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (January 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', (March 2014)

--'The Evolving Dynamics of Support for Banks' (September2013);

--'Sovereign Support for Banks: Bank Support: Likely Rating Paths' (September2013);

--'Sovereign Support for Banks: Update On Position Outlined In 3Q13' (December2013).

Applicable Criteria and Related Research:

Sovereign Support For Banks: Rating Path Expectations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741975

Sovereign Support For Banks: Update on Position Outlined in 3Q13

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726698

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=935156

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.

Contacts

Fitch Ratings
Primary Analyst:
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst:
Senior Director, +1-312-368-5472
Julie Solar
or
Committee Chairperson:
Gordon Scott, +44 20 3530 1075
Managing Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst:
Senior Director, +1-312-368-5472
Julie Solar
or
Committee Chairperson:
Gordon Scott, +44 20 3530 1075
Managing Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com