Moody's Investors Service, the rating services arm of Moody's Corporation (MCO - Free Report) , placed the long-term ratings of Bank of America Corporation (BAC - Free Report) and its subsidiaries, including the principal bank subsidiary, Bank of America N.A., on review for a possible upgrade.
Also, BofA’s counterparty risk assessments have been placed on review for probable upgrade. Notably, the rating agency affirmed all short-term ratings of the company.
Improving Profitability & Conservative Risk Profile Support the Upgrade
The primary reason for placing BofA’s ratings under review is the continuous improvement in profitability and conservative risk profile. These support Moody’s belief that the company will be able to sustain its profits over the long term.
BofA has been witnessing a steady rise in profitability over the past two years. Legacy mortgage servicing and legal issues, which were dragging down the bank’s profitability, have ebbed gradually. Also, its cost savings efforts have supported profitability.
Further, BofA’s businesses have been aided by improvement in the operating environment. Higher interest rates and favorable macroeconomic developments continue to support its earnings.
The rating agency will be evaluating the possibility and sustainability of further improvements in BofA’s profitability. It will be specifically looking into the effect of higher deposit beta on the company’s future earnings growth.
Additionally, Moody’s will be taking into consideration the sustainability of BofA’s conservative risk profile that aided the bank in showing resilience under the Federal Reserve’s severely adverse stress test scenarios. Further, the company’s restrained approach toward loan growth compared to several other big banks will be assessed.
BofA’s credit profile has strengthened, mainly driven by the recent improvements in capital position. While the company remained conservative compared with other big banks in returning capital to shareholders, Moody’s anticipates this to change overtime.
Though increase in capital deployment activities (with the approval from the Fed) may result in a slight deterioration in the company’s capital position, continuously improving profitability and strong balance sheet will likely provide support.
Moody’s also expects that BofA’s strong liquidity position will remain steady at the current levels.
Rise in interest rates, potential lesser regulations, and BofA’s efforts to enhance loans and deposits are expected to support top-line growth. Hence, this will definitely bolster its profitability further.
Shares of BofA have rallied 10.1% so far this year, outperforming the industry’s gain of 4.1%.
Currently, BofA carries a Zacks Rank #3 (Hold).
Stocks Worth Considering
A couple of stocks in the banking space worth a look include Zions Bancorporation (ZION - Free Report) and Community Bank System, Inc. (CBU - Free Report) . Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Zions was revised 8.9% upward for the current year, in the last 60 days. The company’s share price has jumped 41.9% in the past year.
Community Bank System witnessed a 6.1% upward earnings estimate revision for the current year, in the last 60 days. Its share price has increased 11.7% in the past year.
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