On Friday, Bank of America Corporation’s (BAC) individual and preferred stock ratings were upgraded by Fitch Ratings. The rating upgrades reflect the company’s efforts to enhance liquidity and improve asset quality trends across various loan portfolios.

Fitch upgraded BofA’s individual ratings to “C” from “C/D,” preferred stock to “BBB-” from “BB-” and trust preferred to “BBB-” from “BB”. Apart from these upgrades, the long-term issuer default rating (IDR) of “A+” and the short-term IDR of “F1+” remains unchanged. The overall rating outlook remains “Stable”.

Given the emergence of profitability and lower preferred dividends to be paid, Fitch believes that BofA’s capital position will further improve in the coming quarters. At present, preferred dividends are about $300 million per quarter compared to $1.4 billion in the first quarter of 2009.

For the six-month period ended June 2010, BofA’s Tier I common ratio was 8% compared with 6.9% in the year-ago period. According to Fitch, the Tier I common ratio improved from the year-ago levels mainly due to improved internal capital generation, capital raising efforts and decline in risky assets in the company’s balance sheet.

BofA still faces considerable challenges including high nonperforming assets, exposure related to mortgage repurchases and legal risks associated with the acquisitions of Merrill Lynch and Countrywide Financial. However, Fitch views these as far below the asset quality challenges, which the company successfully mitigated over the last few years.

BofA’s earnings potential will considerably increase when the company’s asset quality problems are completely resolved. However, recent regulations such as the Credit Card Accountability Responsibility and Disclosure (CARD) Act and Regulation E are expected to pressurize the non-interest income of the company. Also, the net interest income is anticipated to be negatively impacted by weaker loan demand.

Apart from BofA, the profitability of other companies such as Morgan Stanley (MS), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) will also be affected by the recent regulatory changes.

BofA shares currently retain a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the fundamentals, we are maintaining a long-term Neutral recommendation.

Zacks Investment Research

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