OREANDA-NEWS. Bank of America Corporation's (BAC) stated full tax equivalent fourth quarter earnings of \$3.05 billion were relatively clean, according to Fitch Ratings. It was the first quarter in some time not to be overly marred by sizable litigation charges. Nevertheless the company did incur \$400 million of litigation expense this quarter, though this is down significantly from the other quarters this past year which included significant charges in building up reserves for BAC's settlement with the Department of Justice (DOJ) over mortgage related matters late last year.

Fitch calculated pre-tax profits, which exclude CVA/DVA adjustments, this quarter's FVA adjustment, and various other gains/losses amounted to \$5.0 billion, or a 0.95% pre-tax adjusted return on ending assets (ROA). This is BAC's best Fitch calculated pre-tax adjusted ROA performance in the last five quarters, which Fitch attributes to a largely clean quarter as well as continued expense reductions.

Fitch continues to believe that with all of the legal settlements over the last few years, the strength of BAC's suite of franchises should now become more visible in the company's overall results absent any large and unforeseen legal costs. That said, in order to improve earnings performance to at least peer average levels, BAC will continue to have to work down overall expenses. To the extent that management is successful at closing the earnings gap, there could be some longer-term upside to current ratings.

BAC's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach remained relatively unchanged at 9.6%, as higher common equity via retained earnings was offset by a higher proportion of operational risk weighted assets (RWA), which now amounts to 34% of total RWA. BAC's fully phased-in CET1 under the standardized approach increased to 10.0% as of year-end 2014.

BAC continues to have a highly liquid balance sheet largely driven by its attractive and comparatively low cost consumer deposit base. Additionally, the company continued to reduce its long-term debt footprint and improve its debt maturity profile during the quarter.

While most of BAC's businesses performed relatively well during the quarter, as expected there was some weakness in Global Markets business given a both sequential and year-over-year decline in its Fixed Income, Currency, and Commodities (FICC) businesses. This decline is similar to other peer banks.

BAC's asset quality metrics have continued to improve, thanks in part to some loan sales during the quarter. Nonetheless, Fitch continues to believe that the company's asset quality metrics are at or near a cyclical trough and there should be some reversion in asset quality metrics for BAC, as well as the rest of the industry, over a medium term time horizon.

Additionally, BAC continued to make progress in reducing its overall expenses during the quarter. This included continued reductions in costs associated with its Legacy Asset & Servicing area, continued rationalization of the branch network and overall staffing levels, and ongoing work related to streamlining the company's operations.

This resulted in an improvement in the fully taxable equivalent efficiency ratio to 74.90% during the fourth quarter, which is good, but still well above peer levels. To the extent that BAC can drive down its efficiency ratio (including the impact from any unforeseen litigation costs) to the low 60's or high 50's the earnings gap to peers would significantly improve.