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BofA's (BAC) Ratings Affirmed by Moody's, Outlook Stable

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All the long-term and short-term ratings of Bank of America (BAC - Free Report) , as well as long-term ratings and assessments of BofA’s primary banking subsidiary, Bank of America, N.A., have been affirmed by Moody's Investors Service. Further, the rating outlook for the bank remained unchanged at stable.

The bank’s senior debt rating stands at A2. Additionally, BofA’s short-term deposit rating is unchanged at Prime-1.

Reasons Behind Affirmation

Moody’s had upgraded BofA’s ratings in March 2019. Since then, despite tough operating backdrop and lower rates, the rating agency believes that the bank has shown substantial earnings resilience driven by cost management, investment in technology and diversified business mix. The affirmation also reflects the company’s conservative risk appetite, and solid liquidity and funding positions.

Further, Moody’s is of the opinion that BofA shows “greater resiliency under the Federal Reserve's stress tests than most peers” and the company is primarily focused on better serving its existing clients. Moreover, the company witnessed a substantial fall in “risk-weighted assets (RWAs) under the advanced approaches for operational risk after the Federal Reserve approved its use of an updated model for calculating such RWAs.”

The rating agency also took note that BofA’s capital position has improved since the start of pandemic in March. This is mainly driven by suspension of share repurchases and “a relatively low dividend payout.” Lower operational risk RWAs too provided support to its capital position. Yet, once the regulatory restrictions on capital deployments are lifted, BofA will likely boost payout and thus, its capital ratios will decline from the current level.

Also, the company is more adversely impacted by lower interest rates compared with its peers like Citigroup (C - Free Report) , JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) . Further, in the first three quarters of 2020, BofA’s non-interest income remained almost stable. Hence, the company’s adjusted pre-tax pre-provision profits for the aforesaid period fell 18% year over year. Yet, despite the decline, this provided sufficient cushion to absorb a significant rise in BofA’s credit provisions amid coronavirus-induced economic slowdown and adoption of the Current Expected Credit Losses accounting standard.

Moody’s noted that though BofA might have to build additional reserves in case economic recovery falters, its sufficient pre-tax pre-provision earnings are likely to be able to absorb any such rise. The company’s earnings are expected to rebound over the medium term, driven by prudent expense management, and growth in client assets and deposits. Its profitability levels are not likely to return to pre-crisis level any time soon owing to lower rates.

What Can Trigger Change in Ratings?

BofA’s ratings might be upgraded if it is able to continue maintaining tangible common equity of more than 12% of RWAs and reduce its interest rate sensitivity. Also, low reliance on market-based funding will be a positive.

However, ratings could be downgraded if the company’s profitability declines and capital or liquidity levels relative to peers worsen. Further, a marked rise in risk appetite and/or an ample operational risk charge or control failure will impact the company’s ratings negatively.

Price Performance & Zacks Rank

Over the past six months, shares of BofA have gained 17.7%, underperforming 22.3% rally of the industry.



Currently, BofA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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