|[August 21, 2014]
Fitch: BAC's Settlement With Department of Justice Neutral to Ratings
CHICAGO --(Business Wire)--
Fitch Ratings believes the settlement between Bank of America
Corporation (BAC) and the Department of Justice (DOJ) on behalf of
several governmental entities and State Attorneys General is largely
neutral to BAC's ratings (rated 'A'/'F1'/'a-' with a Negative Outlook by
Fitch) at this point.
Terms of the nearly $17 billion settlement include a $5.02 billion cash
penalty, $4.63 billion in cash restitution, and $7 billion in consumer
relief. The incremental quarterly cost of this agreement is $5.3
pre-tax, as reserves had been built previously. This is a sizable cost
both on an accounting and a cash basis, and Fitch believes this will
likely cause BAC to post a net loss in 3Q'14 though capital ratios
should remain relatively flat.
BAC's Long-term IDR is driven by Fitch's view that there remains an
extremely high probability of support from the U.S. government if
required. The Negative Outlook reflects the agency's expectation that
this probability is likely to decline within one to two years given the
Dodd Frank Act and progress regulators have made on implementing the
Orderly Liquidation Authority. As a result and all else being equal,
Fitch expects to downgrade the Long-term IDR to the level of the
Viability Rating (VR), rated 'a-', by 1H15.
This settlement combined with BAC's other mortgage related settlements,
litigation costs, and charges over the last several years pushes BAC's
overall consideration in these various legal matters to the higher end
of some of Fitch's internal estimates of total mortgage and legal
related exposure that were compiled in the 2009/2010 time frame.
Depending on what expenses, charges, and/or settlements are included in
BAC's overall litigation costs, the cumulative total costs and losses
related to litigation and losses is likely north of $60 billion.
To the extent that other unforeseen or incremental large settlements or
litigation costs arise such that they continue to absorb earnings
generation and/or constrain capital accumulation, there could be
negative pressure on the company's VR and eventually on its IDRs.
Alternatively, to the extent that this settlement with the DOJ largely
resolves much of BAC's legacy exposures and on-going litigation, and
allows management to focus more of its efforts on running and impoving
BAC's core businesses, this could have longer-term positive rating
As stated in prior rating commentary, these implications would be
predicated on management's ability to execute on continued efficiency
initiatives without the overhang of persistent settlements and
litigation costs and to drive new business across the franchise. This
should drive better earnings performance, and combined with higher
short-term interest rates at some point thereby allow for the
incremental build of retained earnings to continue to enhance the
company's capital position over a longer-term time horizon.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (January 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 2014);
--'Peer Review: Global Trading and Universal Banks (March 2014);
--'Fitch Affirms Bank of America's IDR at 'A'; Outlook Revised to
Negative on Support Expectations' (March 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
Peer Review: Global Trading and Universal Banks
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