Moody's Investors Service, the rating services arm of Moody's Corporation has upgraded the long-term issuer rating of Bank of America Corporation BAC from Baa1 to A3. Additionally, the deposits and senior debt rating of its subsidiary, Bank of America N.A., has been upgraded from A1 to Aa3. Also, its baseline credit assessment has been upgraded to baa1 from baa2.
On the other hand, short-term ratings and assessments of the company and its subsidiaries have been affirmed by Moody's. Notably, the rating outlook is stable.
BofA has witnessed improvement in its profitability in the last few years. Moody’s expects the company to sustain this bottom-line growth in the future as well. Moreover, the company’s management has committed to a more conservative risk profile, which is expected to reduce its earnings volatility in the future. Based on the recent profitability growth as well as expectations of future improvement, Moody’s upgraded the company’s ratings.
Because of an aggressive risk profile, BofA had been witnessing various trading losses, high credit costs and litigation charges for several years, which led to high earnings volatility.
However, for the last few years, the company has been trying to lower its risk appetite. In addition to using a more cautious approach for loan growth compared to its peers, the company has constrained the size of its capital markets business.
These have helped drive profitability growth and are expected to further reduce earnings volatility.
Moreover, the company’s declining expenses have supported its bottom-line growth. Its expense-saving plan, Project New BAC (launched in 2011), has helped improve overall efficiency and save as much as $8.0 billion in operating expenses annually till the end of 2014. Notably, the company remains on track to reach nearly $53 billion expense saving target by 2018, which when combined with additional rate hikes is likely to boost its profitability to at least 1% return on tangible assets, per Moody’s.
Further, for the last few years, Bank of America has been using a more conservative approach than its peers in terms of returning capital to shareholders. This has helped it build a solid capital position, thereby strengthening its credit profile.
However, Moody's believes that the company’s capital payouts might increase in the future given that it recently received approval to buy back additional shares over and above of what was mentioned in its capital plan. Although, higher payouts might lead to some deterioration in the company’s capital position, Moody's still expects its tangible common equity to risk-weighted assets ratio to remain above 11% and its tangible common equity to tangible assets ratio to be greater than 7.5%.
Moody’s expectation that the company’s capital and liquidity position will remain at the current levels is also incorporated in the ratings upgrade.
Per Moody’s, a rating upgrade can take place if the company is able to sustain profitability more than 1% of return on tangible assets along with earnings volatility lower than similarly rated peers. Additionally, it will also have to maintain its conservative risk profile and prevent any material reduction in its liquidity or capital ratios.
However, if the company is not able to prevent a material reduction in its liquidity or capital ratios or if its risk appetite increases significantly, its ratings might be downgraded.
BofA’s shares have gained 29.6% so far this year, outperforming the 17.7% rally for the industry it belongs to.
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Currently, the stock has a Zacks Rank #3 (Hold).
A few better-ranked stocks from the finance space are Interactive Brokers Group, Inc. IBKR, Farmers Capital Bank Corporation FFKT and Raymond James Financial, Inc. RJF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for Interactive Brokers have been revised 5.8% upward for 2017 over the past 60 days. Its share price has risen 62.4% over the last six months.
Farmers Capital’s earnings estimates have been revised upward by 5.3% for the current year in the past 60 days. Also, over the last six months, its share price has increased 2%.
Raymond James has witnessed an upward earnings estimate revision of 1.4% for the current fiscal year over the past 60 days. Also, its share price has seen a 15.3% rise over the last six months.
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