Fitch: Strong Earnings Momentum for Bank of America in 3Q17.
These results equated to a 0.98% annualized return on average assets (ROAA), an increase of eight basis points from the year-ago quarter. Similarly, BAC's annualized return on average equity (ROAE) was 8.10%, up from 7.33% in the prior year.
During the quarter, Fitch affirmed BAC's ratings, reflecting the company's strong franchise, improving earnings profile, strong liquidity position and satisfactory capital ratios. To the extent that BAC's operating performance continues to match or exceed the company's own targets, and further closes the gap to peers over an extended period, there could be some upside to ratings or the Rating Outlook.
BAC's total revenue net of interest expense increased nearly 1% relative to the year-ago quarter. Net interest income (NII) increased 9.4% due to a mix of balance sheet growth and higher short-term interest rates. Alternatively, non-interest income declined 6.6% from the year-ago quarter driven by lower mortgage banking income due to a proportionately lower refinancing market and weaker mortgage servicing rights hedge results as well as a decline in sales and trading revenue amid historically low volatility.
BAC's 3Q17 net interest yield (NIY) on a fully taxable equivalent basis was 2.36% compared to 2.23% in the prior year quarter. The 13 basis point improvement was due to a 35 basis point increase in asset yields due to a mix of higher interest rates and balance sheet growth, partially offset by the sale of BAC's non-U.S. credit card portfolio to Lloyds Banking Group PLC last quarter. BAC's cost of interest bearing liabilities only grew by 28 basis points as BAC's savings and money market deposit accounts re-priced much slower than assets.
As long as short-term interest rates continue to increase, BAC estimates that a 100 basis point instaneous increase in the interest rate yield curve would increase NII over the next 12 months an additional $3.2 billion, or 7.1% of 3Q17 NII annualized.
Overall expenses declined 3% year-over-year to $13.1 billion due to lower operating costs, lower litigation expense, and the absence of costs related to the non-U.S. credit card business. This continued expense management, coupled with the improved revenue noted above, helped BAC achieve a 60% efficiency ratio. This was a 200 basis point improvement relative to the year-ago period.
To the extent that BAC's revenue continues to benefit from higher short-term interest rates and the company continues investing in technology to both automate its operating platform and improve customer interfaces, Fitch believes the efficiency ratio could begin to drop below 60% sometime over the next several quarters.
BAC's average loans and leases grew 2.0% year-over-year, including the $9.3 billion sale of the non-U.S. credit card portfolio. Excluding this portfolio from the prior-year period, BAC's overall average loan growth would have been 3.0%, with broad based growth across the platform including 3.9% year-over-year growth in average credit card loans, 5.9% growth in average residential mortgages and 4.6% growth in overall commercial loans. This was offset by continued declines in the legacy mortgage portfolios, a 13.3% reduction on average home equity loans outstanding, and slower growth on commercial real estate (CRE) loan due to some paydowns.
BAC's overall asset quality metrics remain strong with a net charge off (NCO) ratio of 39 basis points in 3Q17. Fitch continues to believe that credit costs for BAC?as well as the rest of the industry?remain near or at cyclical troughs, and Fitch would expect a normalization in credit costs at some point in the next couple of years.
In Fitch's view, BAC's funding remains sound with total deposits of $1.3 trillion and a Time to Required Funding (debt coverage at parent) of 52 months, which increased this quarter due to some incremental long-term debt issuance for Total Loss Absorbing Capacity (TLAC) requirements. BAC's Liquidity Coverage Ratio (LCR) also remains strong at 126%.
BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio under the advanced approaches increased to 11.9% due growth in common equity as well lower risk weighted assets (RWA). Additionally, Fitch continues to note that the denominator of the ratio includes $500 billion of operational risk weighted assets, or 34.2% of total advanced approaches RWA.
BAC is also in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company. The bank level SLR is at 7.4%, well above the 6% minimum, and 7.1% at the parent company, well above the 5%
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Dec 20, 2017|
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