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
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