We downgraded BofA one notch because we believe that the general economic weakness will persist and that in turn, earnings pressures for BofA will be more intense than we anticipated as recently as Dec. 19, 2008, the date of our last downgrade of BofA. BofA's creditworthiness has deteriorated given its exposure to consumer credit and more generally to various asset types that have approached--and, in certain instances, exceeded--the stress tests we used as a basis for our Dec. 19, 2008, sector review of large complex banks and brokers.
In lowering the counterparty credit rating on BofA by no more than one notch, we are placing a significant degree of emphasis on our expectation for the availability of future extraordinary government support. This expectation lifts our ratings on BofA to one notch above the stand-alone credit profile. Specifically, the ratings reflect a combination of expected extraordinary external support from the U.S. government for highly systemically important U.S. financial institutions and BofA's own credit characteristics. In particular, BofA has received explicit support from the U.S. government of $45 billion of hybrid securities plus an additional $4 billion investment as part of a government loss-sharing agreement.
The loss-sharing agreement with the U.S. government covers $118 billion of BofA's riskiest exposures. The terms of the agreement limit BofA's loss exposure to the first $10 billion and 10% of the losses thereafter. However, our concern extends beyond asset exposures. Government support gives BofA more time and flexibility to manage the integration of Merrill Lynch and its troubled asset portfolio without forced liquidations of assets.
Outlook
The outlook is negative. Our ratings on BofA reflect our expectation for a material weakening in the operating environment leading to declines in earnings. We believe that further write-downs associated with the Countrywide and Merrill Lynch acquisitions are also a possibility. More downgrades could follow if, among other potential factors, losses were to continue to pressure common equity levels. We could revise the outlook to stable if BofA's core earnings and general business dynamics prove resilient through the current cycle downturn, as better-than-currently-projected core earnings or improving asset-quality measures and capital levels would demonstrate. However, we view this as unlikely. Over the long term, as explicit government support becomes less necessary, we expect the issuer credit rating and our stand-alone assessment to converge at the current issuer credit rating level, at the stand-alone profile, or if we lower the stand-alone assessment, somewhere in between. Sphere: Related Content
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