Fitch Affirms Bank of America's (BAC) IDR at 'A'; Outlook Revised to Negative

Fitch Ratings has affirmed Bank of America Corporation's (NYSE: BAC) Long-term Issuer Default Rating (IDR) at 'A' and revised the Rating Outlook to Negative from Stable. At the same time, Fitch affirmed BAC's Short-Term IDR at 'F1', Viability Rating (VR) at 'a-', Support Rating (SR) at '1', and Support Rating Floor (SRF) at 'A'. A full list of rating actions, including actions on BAC's main subsidiaries and debt ratings, is at the end of this rating action commentary.

The revision of the Outlook on BAC's support-driven Long-term IDR to Negative reflects Fitch's expectation that the probability that the bank would receive support from the U.S. government if ever required is likely to decline within one to two years. Therefore, Fitch expects to revise BAC's Support Rating to '5' and its SRF to 'No Floor' within the next one to two years, likely to be at some point in late 2014 or in 1H15.

The rating actions have been taken in conjunction with a review of support for banks globally and also as part of a periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. Fitch's outlook for the sector is stable on balance. Earnings pressure in securities businesses, particularly in fixed income, and continued conduct and regulatory risks present in the GTUBs are offset by stronger balance sheets as capitalisation and liquidity remain sound. Fitch forecasts stronger GDP growth in most economies, which should contribute to a more balanced economic environment, but the economic environment is likely to remain challenging in 2014.

Today's rating actions assume that BAC will perform adequately under the CCAR stress test, though Fitch has no visibility into any potential qualitative rejections for BAC, or any of the other 29 banks subject to regulatory stress testing. Although a qualitative rejection of a capital plan request under CCAR would be viewed negatively by Fitch, it is not expected to have any rating implications for BAC.

KEY RATING DRIVERS - IDRS, SENIOR DEBT, SR AND SRF

BAC's Long and Short-term IDRs, SR and Support Rating Floor SRF reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government ('AAA'/Stable Outlook) if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to BAC, Fitch's view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, significant deposit market share and its position as a key provider of financial services to the U.S. economy. BAC's IDRs and senior debt ratings benefit from support because BAC's VR is below its SRF.

The Negative Outlook on BAC's Long-term IDR reflects Fitch's view that there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvency assessments.

KEY RATING DRIVERS AND SENSITIVITIES - IDRS, SENIOR DEBT, SR AND SRF

As BAC's Long-term IDR is at its SRF and Fitch does not expect any upward momentum in its VR during the typical Outlook horizon, the sensitivities of its IDR's are predominantly the same as those for the SRF. The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). Hurdles that remain include the resolution of how cross-border derivative acceleration/termination provisions are handled and that there is sufficient contingent capital at the holding company to recapitalize without requiring government assistance.

Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term. However, regardless of when it finalizes, Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise BAC's Support Rating to '5' and its SRF to 'No Floor' within the next one to two years, likely to be some point in late 2014 or in 1H15.

A revision of the SRF to 'No Floor' would mean BAC's Long-term IDR and senior debt ratings would likely be downgraded to the level of its VR, which as it currently stands would mean a one notch downgrade to 'A-'. After a revision of the SRF, the Long-term IDR and the Outlook would be sensitive to the same factors as its VR. BAC's Short-term IDR of 'F1' would not necessarily be affected by the support actions discussed above. Fitch's rating criteria does allow for entities with IDRs of 'A-' to have a short-term rating of 'F1'

KEY RATING DRIVERS - VR

BAC's VR continues to be supported by strong capital and liquidity positions, as well as a slowly improving earnings profile. BAC also continues to make substantial progress in resolving its legacy litigation risks, all of which continue to strengthen the firm's credit profile.

To this end, BAC recently received approval from the Supreme Court of New York for its $8.5 billion private label residential mortgage backed securities (PLS) with Bank of New York Mellon (BK) as trustee. Reserves for this $8.5 billion settlement as well as an incremental $100 million of litigation costs had already been taken, so Fitch does not anticipate an impact on capital or liquidity once the company begins to make settlement payments. Fitch views the approval of this settlement as a positive for BAC.

This settlement has been appealed by certain parties and others, namely American International Group (AIG), may still file an appeal. However, given this ruling from the court as well as the improving performance of many of the PLS causing some litigants to drop their objection to the settlement, Fitch would expect the incremental liability from a potential appeal to be much lower for BAC than it would have been previously.

BAC's largest remaining legacy litigation exposure is in both New York and California related to Federal Housing Finance Agency (FHFA) PLS claims. In a prior special report, based on settlement rates for other institutions, Fitch estimated that FHFA litigation losses could total between $5 billion and $8 billion. With the BK as trustee settlement approved, it is likely that BAC's FHFA losses can be managed within the context of current earnings forecasts and existing capital ratios.

BAC's earnings profile continues to improve, though the Fitch calculated (which exclude CVA/DVA adjustments and various other gains/charges) pre-tax return on assets (ROA) of 0.82% over the last two quarters was aided by substantial reserve releases in each of the last two quarters. Without the large reserve releases, BAC's Fitch calculated ROA would have remained well below some large peer banks, which is important because Fitch expects reserve releases to moderate over the course of 2014 primarily due to more modest increases in home prices nationally and BAC's more moderate level of reserves.

BAC has a number of strong franchises within its mix of businesses, whose earning power could, over time, begin to emerge as BAC continues to wind down its legacy litigation exposures and reduce its overall cost structure. To the extent that management is able to achieve its cost reduction initiatives over an intermediate to long-term time horizon, BAC's core earnings performance could be more consistent with peer GTUB banks and the company's long-term cost of equity assumption.

BAC's VR continues to be supported by strong liquidity and a good capital position as the company focuses on improving earnings performance.

As of the end of 2013, BAC's time to required funding was strong at 38 months, and Fitch believes BAC's Liquidity Coverage Ratio (LCR) would be comfortably above current regulatory guidance. Additionally, BAC's Basel III Tier One Capital (CET1) ratio under the advanced approach was stable at 9.96%. In addition, BAC estimates that it would be in compliance with the proposed supplementary leverage ratio (SLR) requirements at the holding company as well as its two main bank subsidiaries in the U.S., Bank of America, N.A. and FIA Card Services, N.A.

KEY RATING DRIVERS AND SENSITIVITIES - VR

Longer-term positive rating momentum for the VR is predicated on a consistent improvement in overall earnings to at least levels of other G-SIFI institutions, all while maintaining ample liquidity and a good capital position

Notwithstanding the impact of the reserve releases noted above on recent earnings performance, BAC's core earnings have also been moderately volatile on a quarterly basis given the company's large reliance on capital markets activities. Capital markets revenue currently approximates one-third of overall revenue, and was somewhat weak in the third quarter of 2013 (3Q13) but substantially improved in the typically slow fourth quarter of 2013 (4Q13).

Over time, the capital markets businesses contribution to earnings could decline and therefore add some stability to overall earnings should management be able to execute on improving performance in the company's retail banking business as well as maintain its strong performance in wealth management. This could be a positive rating factor over a longer-term time horizon.

Should remaining litigation exposures or other unforeseen charges result in a significant net earnings loss in excess of Fitch's stressed scenarios, or if the company's regulatory or tangible capital ratios begin to meaningfully decline over a near-to-intermediate term time horizon, the VR could be downgraded. While it is not expected that BAC's overall credit quality will materially deteriorate over the near term, should the company experience a severe risk management failure this could negatively impact the VR.

KEY RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

BAC's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

The ratings of long and short-term deposits issued by BAC and its subsidiaries are primarily sensitive to any change in BAC's IDR. This means that should BAC's Long-term IDR be downgraded due to Fitch's evolving view of support discussed above, deposit ratings could be similarly impacted.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by BAC and by various issuing vehicles are all notched down from BAC's or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The ratings of subordinated debt and other hybrid capital issued by BAC and its subsidiaries are primarily sensitive to any change in BAC's VR.

KEY RATING DRIVERS AND SENSITIVITIES - HOLDING COMPANY

BAC's IDR and VR are equalized with those ratings of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. It has modest double leverage.

Should BACs' holding company become under-capitalized or have cash flow coverage of less than 18 months to meet obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of BAC's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA and therefore IDRs and VRs of Bank of America, N.A., Bank of America Georgia, Bank of America Rhode Island, N.A., FIA Card Services N.A., LaSalle Bank N.A., United States Trust Company N.A., are equalised across the group. Fitch regards BAC's investment banking and broker-dealer entities such as Merrill Lynch & Co. Inc. and related entities and Bank of America Merrill Lynch International Ltd to be core entities for BAC and thus IDRs equalized and linked to BAC.

Fitch views BAC's MBNA Limited subsidiary's ratings to be strategically important for BAC and thus IDRs of this entity are one notch lower than BAC's IDR in accordance with Fitch's rating criteria.

As the IDRs and VRs of the subsidiaries are equalised with those of BAC to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in BAC's IDRs.

To the extent that one of BAC's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from BAC's IDR.

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 also became one of the top financial institutions in wealth management and investment banking.

The rating actions are as follows:

Bank of America Corporation
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+'
--Long-term market linked securities at 'A emr';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Viability Rating at 'a-';
--Preferred stock at 'BB'
--Support at '1';
--Support floor at 'A'.

Bank of America N.A.
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+'
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Short-term deposits at 'F1';
--Viability Rating at 'a-'
--Support at '1';
--Support floor at 'A'.

Bank of America Georgia, N.A.
Bank of America Oregon, National Association
Bank of America California, National Association
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Viability Rating at 'a-';
--Support at '1';
--Support floor at 'A'.

Bank of America Rhode Island, National Association
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Long-term deposits at 'A+';
--Short-term deposits at 'F1';
--Viability Rating at 'a-';
--Support at '1';
--Support floor at 'A'.

FIA Card Services N.A.
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Long-term deposits at 'A+';
--Short-term deposits at 'F1';
--Short-term debt at 'F1';
--Long-term senior debt at 'A';
--Viability Rating at 'a-';
--Support at '1';
--Support floor at 'A'.

LaSalle Bank Corporation
--Long-term IDR at 'A', Outlook Negative
--Short-term IDR at 'F1';
--Viability Rating at 'a-';
--Support at '1';
--Support floor at 'A'.

Merrill Lynch & Co., Inc.
--Long-term senior debt at 'A';
--Long-term market linked notes at 'A emr';
--Long-term subordinated debt at 'BBB+';
--Short-term debt at 'F1';

Merrill Lynch, Pierce, Fenner & Smith, Inc.
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1'.

Bank of America Merrill Lynch International Limited
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1'.

B of A Issuance B.V.
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+';
--Support at '1'.

Secured Asset Finance Company B.V.
--Senior debt at 'A'.

Secured Asset Finance Company LLC
--Senior debt at 'A'.

LaSalle Bank N.A.
LaSalle Bank Midwest N.A.
--Long-term deposits at 'A+';
--Short-term deposits at 'F1'.

United States Trust Company N.A.
Countrywide Bank FSB
--Long-term deposits at 'A+';
--Short-term deposits at 'F1';

MBNA Canada Bank
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+';
--Short-term IDR at 'F1'.

MBNA Limited
--Long-term IDR at 'A-', Outlook Negative;
--Long-term senior debt at 'A-';
--Short-term IDR at 'F1'
--Support at '1'.

Merrill Lynch International
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Support at '1'.

Merrill Lynch International Bank Ltd.
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Support at '1'.

Merrill Lynch B.V.
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Long-term market linked securities at 'A emr';
--Support at '1'.

Merrill Lynch & Co., Canada Ltd.
--Short-term IDR at 'F1';
--Short-term debt at 'F1'.

BAC Canada Finance
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Short-term IDR at 'F1';
--Support at '1'.

Merrill Lynch Japan Finance Co., Ltd.
--Long-term IDR at 'A', Outlook Negative;
--Long-term senior debt at 'A';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Support at '1'.

Merrill Lynch Japan Securities Co., Ltd.
--Long-term IDR at 'A', Outlook Negative;
--Short-term IDR at 'F1';
--Support at '1'.

Merrill Lynch Finance (Australia) Pty LTD
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

Merrill Lynch S.A.
--Long-term market linked securities at 'A emr'.

BankAmerica Corporation
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+'.

Countrywide Financial Corp.
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+'.

Countrywide Home Loans, Inc.
--Long-term senior debt at 'A';
--Long-term senior shelf unsecured rating at 'A';

FleetBoston Financial Corp
--Long-term subordinated debt at 'BBB+'.

LaSalle Funding LLC
--Long-term senior debt at 'A';

MBNA Corp.
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+';
--Short-term debt at 'F1'.

NationsBank Corp
--Long-term senior shelf debt at 'A';
--Long-term senior debt at 'A';
--Long-term subordinated debt at 'BBB+'.

NCNB, Inc.
--Long-term subordinated debt at 'BBB+'.

BAC Capital Trust VI-VIII
BAC Capital Trust XI - XV
--Trust preferred securities at 'BB+'.

BAC AAH Capital Funding LLC I - VII
BAC AAH Capital Funding LLC IX - XIII
--Trust preferred securities at 'BB+'.

BankAmerica Capital III
BankBoston Capital Trust III-IV
Barnett Capital Trust III
Countrywide Capital III, IV, V
Fleet Capital Trust V
MBNA Capital B
NB Capital Trust III
--Trust preferred securities at 'BB+'.

Merrill Lynch Preferred Capital Trust III, IV, and V
Merrill Lynch Capital Trust I, II and III
--Trust preferred securities at 'BB+'.

Fitch will hold a teleconference to discuss sovereign support for banks and give an update on rating paths on Friday, March 28 at 15:00 GMT.

Callers must register in advance using the link below and are requested to dial in early:

http://event.onlineseminarsolutions.com/r.htm?e=773507&s=1&k=E99B5BCE23C11883F75DA40C4B1FED21

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