Fitch Ratings has upgraded the Individual and Preferred Stock ratings of the Bank of America Corporation and has removed them from the rating Watch Positive. The upgrade includes Individual rating made C from C/D. The preferred stock rating goes to BBB- from BB- and the Trust Preferred rating has gone to BBB- from BB. The short term IDR is at F1+ and the long term Issuer Default Rating of A+. Both of these are affirmed at current levels and the Rating Outlook is stable.
These upgrades primarily reflect the efforts made by Bank of America Corp to boost common equity and liquidity combined with stable. The programs also include improving on trends of asset quality in various categories of the portfolio. The diversified and sizeable banking franchise of BAC has also been identified by the ratings. The ratings have also taken into account the way management uncertainties have been resolved since the last rating action of Fitch`s in December 2009.
Some of the remaining challenges have tampered the upgrades to some extent. These challenges include a high percentage of nonperforming loans and exposure to mortgage repurchases for rep. There are also some warranty issues. A significant concern is posed by legal risk too, particularly the litigation related to the Merrill and Countrywide acquisitions. Although these challenges are considerable if not overwhelming, Fitch is considering them as significantly below the various asset quality challenges that have already been worked out successfully over the last few years by Bank of America Corp.
The exposure to reps and warranties primarily emanates from the acquisition made by BAC of Countrywide, which was a major originator during the housing boom. New repurchase requests are likely to flow in large amount as per the anticipation of Fitch, even as major institutions and government sponsored entities will work through troubled mortgages. BAC, according to Fitch is the US Bank most susceptible to this risk. The cost of warranties and reps has increased in the second quarter of 2010 to 1.2 billion dollars from an approximate 500 million dollar run rate in the last few quarters. Another area of concern beyond reps and warranties is the exposure to home equity loans. Higher losses have been incorporated by Fitch associated with repurchase activity. These are likely to remain manageable though in the context of the larger capital base of BAC and its pre-provision operating income.