Fitch Ratings said Thursday morning that it had revised its rating outlook on Bank of America Corp. and subsidiaries to negative from a previously stable outlook, while affirming all outstanding ratings. The bank currently maintains a 'AA' rating from Fitch. In a press statement, the ratings agency said its move "reflects the fact that BAC's earnings have a significant level of sensitivity to trends in the deteriorating residential mortgage market." Bank of America announced in early December that it would increase provisions substantially to offset deterioration in home equity loans, and negative mark-to-market valuations in its mortgage-related holdings of CDOs will be larger than previously anticipated. In a discussion of the ratings action (registration req'd), Fitch said that it expects BofA to fall below its Tier 1 target capital ratio at the end of 2007:
Fitch believes that the negative conditions in the credit markets will likely persist beyond 4Q'07 and could put significant pressure on earnings into 2008. Such pressure would likely be reflected in a combination of further CDO markdowns, the need for additional provisions in home equity or other consumer loans, and/or mark to market losses in other trading and securitization exposures. BAC also faces other challenges. Tier 1 capital will likely decline well below management's 8% target at year-end (YE) 2007, due in part to the recent acquisition of LaSalle Bank Corporation and in part to depressed earnings in 3Q'07 and 4Q'07. Management will also need to integrate LaSalle's higher-risk commercial loan book at a time when the commercial credit cycle is weakening. Management is also reviewing its activities in the capital markets area and may decide to exit several businesses. While this action will likely improve BAC's risk-reward profile in the long-term, it could have an additional earnings impact in the short term.
Bank of America fell 18 cents in active trading, closing at $41.41. Shares were off an additional 6 cents in after-hours trading.