CHICAGO--(BUSINESS WIRE)--Bank of America Corporation's (BAC) reported first quarter 2015 (1Q'15) earnings of $3.36 billion were improved, according to Fitch Ratings. The company's earnings improved relative to both the sequential quarter, which is typically seasonally slower, and the prior year quarter, which was marred by significant litigation charges.
Fitch calculated pre-tax profits, which excluded DVA/FVA adjustments and various other gains/losses, amounted to a fully taxable equivalent amount of $4.8 billion, or a 0.89% adjusted pre-tax return on ending assets. Fitch views this result favorably, and notes that it is some evidence of the strength of BAC's suite of franchises as well as management's efforts to reduce costs and streamline BAC's operations. Fitch would expect further earnings improvements over time, and notes that this may lead to some upward momentum in BAC's ratings over time.
BAC's total revenue of $21.2 billion was up relative to the sequential quarter, but down relative to the year-ago quarter. Revenue per business line was generally stable to modestly down. However, there was a strong improvement in BAC's mortgage banking income in the Consumer Banking segment.
BAC's Global Banking business net income was down sequentially but up relative to the year-ago quarter. Lower net interest income (NII) in this segment as well as lower investment banking fees were offset by lower provision expense and lower non-interest expenses both compared to the year-ago quarter. Loan growth in this segment improved modestly, with average loans up slightly versus the year-ago quarter. Fitch would expect additional loan growth to help drive results in this segment over time.
BAC's Global Markets business net income was seasonally up relative to the sequential quarter which was also marred by charges, but was down relative to the year-ago quarter. The year-over-year decline was due to lower revenue from Fixed Income Currency & Commodities (FICC) as well as lower revenue from credit and mortgage products, which was partially offset by higher foreign exchange (FX) and rates trading revenue due to higher market volatility. However, since BAC's macro (FX and rates) platform is not as large as other market participants, it could not fully offset the decline in FICC. BAC's equities revenue was relatively stable.
Expense reductions remain a high priority for BAC. Relative to the year-ago quarter, BAC's expenses were down even excluding the large litigation charge recorded in 1Q'14. This was due in part to continued headcount optimization in the core businesses as well as the Legacy Asset Servicing (LAS) segment as well as continued branch network rationalization. Fitch expects management to continue to pull these levers, among others, to streamline the company's operations, and notes this to be a key factor in helping to improve BAC's earnings power.
Asset quality metrics for BAC, as well as the rest of the industry, continue to improve and Fitch believes them to be at or near a cyclical trough. Fitch would expect some reversion in asset quality metrics over a medium-term time horizon.
In addition, BAC's capital and liquidity metrics both improved during the quarter, which Fitch views positively from a credit perspective.
The company's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach increased due 10.3% in 1Q'15 up from 10% in 4Q'14 due to improved earnings, a lower deferred tax asset deduction, and a benefit from accumulated other comprehensive income (AOCI) amid the rally in rates during the quarter.
BAC's fully phased-in Basel III CET1 ratio under the advanced approaches was 10.1% in 1Q'15, though BAC has indicated that it may have to modify some of its credit models in order to gain approval to exit parallel run from regulators, which it estimates could reduce this ratio by approximately 100 basis points.
In addition, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR), which was 6.3% at the holding company and 7.1% at the primary bank subsidiary as of 1Q'15.
Additional information is available at www.fitchratings.com