All three credit rating agencies have upgraded Bank of America's (BAC +1.38%) debt rating since May 19th. The moves signal a dramatic change in tone for the ratings agencies and, at least in my opinion, provide further proof that the $2.2 trillion bank may be on the verge of a sharp recovery that isn't reflected in its current share price.
This is an important issue for Bank of America because it pays higher interest rates to borrow money than many of its competitors do, particularly on a long-term basis.
To put this in perspective, had Bank of America paid the same interest rate as Wells Fargo over the past 12 months, it would have saved approximately $2 billion in interest expense. That would have boosted Bank of America's pre-tax earnings by an average of 23.6% in each of the past four quarters.
Given this, it was peculiar that the ratings upgrades haven't made the news. When Standard & Poor's announced its decision on July 23rd, there was no mention of it by mainstream media outlets.
It also wasn't discussed on Bank of America's second-quarter conference call, held July 15th.
Even Standard & Poor's approached the situation discreetly, issuing a press release that's accessible only if you have a user name and password to log onto its website.
I came across it by reading through Bank of America's latest 10-Q. But unlike the other notable events that occurred during the quarter, which were featured at the beginning of the report, the news about its ratings upgrades didn't appear until page 75 -- long after most people have lost interest in the 239-page regulatory filing.
This is why I believe investors in the nation's second biggest bank by assets may not be factoring this development, or what it reflects about the state of the Bank of America's operations, into its share price.
To this end, the rationale for the ratings agencies' moves speak to the bank's substantial improvement over the past year.
Standard & Poor's noted that Bank of America's legal and regulatory risks have declined and that "any incremental charges will be manageable." It also acknowledged the bank's "progress in steadily reducing the size of its legacy mortgage portfolio, which has resulted in lower credit costs and an improved risk profile."
Just as importantly, the agency observed that Bank of America's business franchise is "among the best in the U.S., with significant scale and leading market positions nationwide, including in its retail and commercial banking, capital markets, and wealth management businesses." And it concluded its assessment by noting that the bank's "balance sheet remains strong, with ample capital and liquidity."
As I noted at the top, this is a dramatic change in tone for the ratings agencies, which have spent much of the past eight years downgrading Bank of America's rating. I'd encourage current and prospective shareholders to take note.
