CHICAGO--(BUSINESS WIRE)--Bank of America Corporation's (BAC) reported results for first quarter 2016 (1Q'16) are the lowest quarterly level of profits the company has generated since 3Q'14, according to Fitch Ratings. BAC reported net income of $2.7 billion down from $3.3 billion in the sequential quarter and also down from $3.1 billion in the year-ago quarter.
The year-over-year decrease was driven primarily by continued challenges in capital markets activity and an increase in the allowance for loan losses (ALLL) tied to the company's energy portfolio. Positively offsetting results, BAC has seen continued success in bringing down expenses throughout the organization, a key area of focus for the bank.
BAC's results were also impacted by two accounting-related factors which drove reported net income down relative to prior quarters. Specifically, the company's net interest income included a FAS 91 negative $1.2 billion market-related adjustment for bond premium amortization and a $850 million incentive expense related to FAS 123, which is taken in the first quarter of each year.
BAC's 1Q'16 net income equated to a 0.50% annualized return on average assets (ROAA) down from both 0.61% in the sequential quarter and 0.59% a year ago. The company's reported 1Q'16 annualized return on average equity (ROAE) was just 3.8%, down from the 5.1% ROAE it generated in 4Q'15 and 4.9% in 1Q'15. These results remain well below the results of other large bank peers, reporting to date, faced with similar economic and regulatory challenges.
Even with fairly small outstanding energy exposure at approximately 2% of its total balance sheet, BAC has not been immune to feeling the impacts of volatile energy markets. Utilized energy exposure for 1Q'16 was $21.8 billion, up by roughly $500 million from 4Q'15 as the result of increases in balances tied to refining and marketing. Of its total energy exposure, BAC attributes $7.7 billion to what it considers higher risk companies in exploration and production (E&P) and oil field services (OFS). This exposure declined approximately $600 million from the last quarter. The company reports that 56%, or $4.3 billion, of its outstanding exposure to these 'higher risk sub-sectors' is criticized.
BAC's ALLL tied to its energy portfolio increased to $1 billion, or 4.5% of total outstanding energy exposure, at 1Q'16 from $500 million at 4Q15. Fitch believes much of the $1 billion, however, is tied to BAC's 'higher risk sub-sectors' exposure. The comparatively smaller size of BAC's energy exposure to the company's overall balance sheet should allow loan losses to be manageable over time, though Fitch does expect sustained higher provisioning for these credits as long as energy markets remain volatile.
Investment banking fees experienced headwinds during the quarter as the overall debt and equity issuance environment continues to be volatile. Total investment banking fees (inclusive of self-led deals) generated from BAC's Global Banking and Global Markets segments were down $108 million and $351 million from 4Q15 and 1Q'15 respectively. These results are consistent with those peers that have released 1Q'16 earnings and generally in-line with market activity. Within BAC's Global Markets segment, trading revenue was up approximately $650 million sequentially but down $600 million from 1Q'15 when excluding a net debit valuation adjustment.
Positively, BAC's Consumer Banking segment had a consistent, solid quarter, generating net income of $1.79 billion, essentially flat sequentially and up a notable $324 million year-over-year. Total revenue was down 1.5% sequentially, but BAC's continued focus on finding efficiencies within the segment have resulted in a lower expense base and better efficiency. Moreover, improved asset quality within the segment resulted in provision of $560 million for the quarter, down $122 million sequentially and $156 million from 1Q'15.
In BAC's Global Wealth & Investment Management segment, total revenue was down from the year-ago due to lower transactional activity and lower market valuations. Total revenue was flat sequentially within the segment.
BAC's liquidity position remains sound. The company built its 'Global Excess Liquidity Sources', or high-quality liquid assets, to $525 billion, its highest level ever, during 1Q'16. Time to Required Funding (debt coverage at parent) was 36 months. Meanwhile, deposits within BAC's Consumer Banking segment grew $19.4 billion from 4Q'15, which accounted for nearly all of the company's deposit growth during the quarter.
BAC's fully phased-in Basel III Tier 1 Common equity (CET1) ratio rose 30 basis points sequentially, to 10.1% under the advanced approach through a combination of growth in CET1 capital and a reduction in risk-weighted assets (RWA). The RWA decrease was driven by reductions related to retail exposures as credit quality improved during the quarter. Given that the advanced approaches ratio is lower than the standardized approach, it remains BAC's binding constraint. The bank holding company supplementary leverage ratio (SLR) was 6.8% while the bank-level SLR was 7.4%.
The bank repurchased $1 billion in common stock during the quarter, and BAC's board of directors authorized increasing its common stock repurchase plan by up to $800 million. The new stock repurchase authorization is in addition to the bank's $4 billion share repurchase plan announced during last year's CCAR process.
Yesterday, the Federal Deposit Insurance Corporation and the Federal Reserve Board announced they had determined that BAC's resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. Areas where improvement is needed include liquidity, governance mechanisms, legal entity rationalization and derivatives and trading activities. If the bank fails to remediate deficiencies by Oct. 1, 2106, it may be subject to more stringent prudential requirements. Fitch believes management will work diligently to address all deficiencies noted in the regulatory feedback.
Additional information is available on www.fitchratings.com