NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of Bank of America Corporation (BAC) to 'A/F1' from 'A+/F1+' and the viability rating (VR) to 'bbb+' from 'a-', and removed these ratings from Rating Watch Negative.
This action is in tandem with Fitch's broad assessment of the largest global banking institutions which resulted in a number of negative rating actions. The Rating Outlook is Stable. A complete list of affected ratings follows this release.
The downgrade of the IDR reflects a lowering of the Support Floor for BAC to 'A' from 'A+' as broadly discussed in Fitch's special report titled 'U.S. Banks - Sovereign Support: When Does it End' dated Dec. 15, 2011.
While Fitch believes that broad policy momentum remains to reduce taxpayer funds to support banks in times of crisis, this is progressing at an uneven pace globally.
Consequently, Fitch continues to embody a view of support in the IDRs of BAC and other U.S. Global Systemically Important Financial Institutions (G-SIFIs) over the near term.
The issue of 'too big to fail' is not one that can be solved rapidly and without increased global cooperation, particularly against the backdrop of still volatile financial markets.
Fitch will continue to assess this view of support in light of further regulatory developments, the macro environment, health of institutions and the financial industry as a whole. As global market conditions normalize and resolution regimes become more harmonized, Fitch would reassess its current views for U.S. G-SIFIs.
Ultimately, BAC's IDR is determined based on the higher of Fitch's Support rating floor or its VR. Today's downgrade of the VR stems from Fitch's view that BAC faces comparatively higher overall risks, particularly related to potential legal liabilities, combined with a relatively weaker capital position.
BAC's Tier I common ratio of 8.65% remains below the 9.9% average of the top four diversified U.S. banks.
Fitch believes that BAC is committed to building capital over time to a level more in line with peer averages. In fact, BAC has already announced actions in fourth quarter 2011 (4Q'11) that will significantly benefit the Tier 1 common ratio.
However, in the near term BAC will continue to lag major U.S. peers in capital strength while at the same time carrying higher-than-average overall risks in Fitch's view.
Fitch believes that ongoing litigation risks remain larger than peers'. Litigation risks include uncertainty regarding court approval of the Countrywide RMBS settlement combined with a considerable amount of other legal issues.
The amount of the Countrywide RMBS settlement (reserved for in 2Q'11) has underpinned Fitch's base case assumption on estimated rep and warranty losses from private label securities (as detailed in Fitch's report 'Private Label Representations and Warranties' dated July 27, 2011).
Uncertainty regarding court approval of this settlement combined with a considerable degree of other litigation issues could potentially increase overall charges beyond Fitch's base case view.
That said, Fitch has stressed rep and warranty losses well beyond its base case assumption and continues to believe that this issue is ultimately manageable when considering BAC's core earnings, reserves and capital.
Secondly, BAC's loan exposure to the U.S. residential real estate market remains a concern, particularly given the potential for continued pressure on real estate values combined with economic uncertainties. BAC is a major lender to first- and second-lien mortgage loans in the U.S.
Large reliance in recent years on capital markets activities for revenues and earnings is also a concern in view of the current market uncertainties and the inherent volatility of this line of business. Results for 3Q'11 highlight this volatility as the global banking and markets segment recorded reduced results in common with peers.
Should Fitch over time further reduce its assessment of the probability of the U.S. government to support BAC and other G-SIFIs in the event of need, the IDRs and other support-driven ratings could be negatively affected. In the event of a complete elimination of support, the long-term IDR would be adjusted to the level of the VR.
Any positive momentum for the VR would require a reduction in litigation risks combined with an increase in capital to a level more in line with major peers. A higher VR would also hinge on positive trends in loan portfolio quality along with the maintenance of a sound liquidity and funding profile.
The VR could be downgraded further if additional litigation-related or other charges result in significant bottom line losses and a significant reduction in capital ratios.
In addition, any renewed pressure on loan portfolio quality could negatively affect the VR. This is not expected in the very near term. However, if the environment becomes more challenging and real estate values decline further, portfolio quality could be adversely affected.
The Rating Watch Negative that is being maintained for BAC's subordinated debt and preferred instruments reflects the heightened downgrade risk associated with the pending completion of Fitch's review of how it rates bank regulatory capital instruments.
This review was initiated by the exposure draft entitled 'Rating Bank Regulatory Capital Securities' published on 28 July 2011.
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 became one of the top financial institutions in wealth management and investment banking.
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This action is in tandem with Fitch's broad assessment of the largest global banking institutions which resulted in a number of negative rating actions. The Rating Outlook is Stable. A complete list of affected ratings follows this release.
The downgrade of the IDR reflects a lowering of the Support Floor for BAC to 'A' from 'A+' as broadly discussed in Fitch's special report titled 'U.S. Banks - Sovereign Support: When Does it End' dated Dec. 15, 2011.
While Fitch believes that broad policy momentum remains to reduce taxpayer funds to support banks in times of crisis, this is progressing at an uneven pace globally.
Consequently, Fitch continues to embody a view of support in the IDRs of BAC and other U.S. Global Systemically Important Financial Institutions (G-SIFIs) over the near term.
The issue of 'too big to fail' is not one that can be solved rapidly and without increased global cooperation, particularly against the backdrop of still volatile financial markets.
Fitch will continue to assess this view of support in light of further regulatory developments, the macro environment, health of institutions and the financial industry as a whole. As global market conditions normalize and resolution regimes become more harmonized, Fitch would reassess its current views for U.S. G-SIFIs.
Ultimately, BAC's IDR is determined based on the higher of Fitch's Support rating floor or its VR. Today's downgrade of the VR stems from Fitch's view that BAC faces comparatively higher overall risks, particularly related to potential legal liabilities, combined with a relatively weaker capital position.
BAC's Tier I common ratio of 8.65% remains below the 9.9% average of the top four diversified U.S. banks.
Fitch believes that BAC is committed to building capital over time to a level more in line with peer averages. In fact, BAC has already announced actions in fourth quarter 2011 (4Q'11) that will significantly benefit the Tier 1 common ratio.
However, in the near term BAC will continue to lag major U.S. peers in capital strength while at the same time carrying higher-than-average overall risks in Fitch's view.
Fitch believes that ongoing litigation risks remain larger than peers'. Litigation risks include uncertainty regarding court approval of the Countrywide RMBS settlement combined with a considerable amount of other legal issues.
The amount of the Countrywide RMBS settlement (reserved for in 2Q'11) has underpinned Fitch's base case assumption on estimated rep and warranty losses from private label securities (as detailed in Fitch's report 'Private Label Representations and Warranties' dated July 27, 2011).
Uncertainty regarding court approval of this settlement combined with a considerable degree of other litigation issues could potentially increase overall charges beyond Fitch's base case view.
That said, Fitch has stressed rep and warranty losses well beyond its base case assumption and continues to believe that this issue is ultimately manageable when considering BAC's core earnings, reserves and capital.
Secondly, BAC's loan exposure to the U.S. residential real estate market remains a concern, particularly given the potential for continued pressure on real estate values combined with economic uncertainties. BAC is a major lender to first- and second-lien mortgage loans in the U.S.
Large reliance in recent years on capital markets activities for revenues and earnings is also a concern in view of the current market uncertainties and the inherent volatility of this line of business. Results for 3Q'11 highlight this volatility as the global banking and markets segment recorded reduced results in common with peers.
Should Fitch over time further reduce its assessment of the probability of the U.S. government to support BAC and other G-SIFIs in the event of need, the IDRs and other support-driven ratings could be negatively affected. In the event of a complete elimination of support, the long-term IDR would be adjusted to the level of the VR.
Any positive momentum for the VR would require a reduction in litigation risks combined with an increase in capital to a level more in line with major peers. A higher VR would also hinge on positive trends in loan portfolio quality along with the maintenance of a sound liquidity and funding profile.
The VR could be downgraded further if additional litigation-related or other charges result in significant bottom line losses and a significant reduction in capital ratios.
In addition, any renewed pressure on loan portfolio quality could negatively affect the VR. This is not expected in the very near term. However, if the environment becomes more challenging and real estate values decline further, portfolio quality could be adversely affected.
The Rating Watch Negative that is being maintained for BAC's subordinated debt and preferred instruments reflects the heightened downgrade risk associated with the pending completion of Fitch's review of how it rates bank regulatory capital instruments.
This review was initiated by the exposure draft entitled 'Rating Bank Regulatory Capital Securities' published on 28 July 2011.
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 became one of the top financial institutions in wealth management and investment banking.
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