OREANDA-NEWS. Bank of America's (BAC) second quarter 2016 earnings improved relative to the sequential period due to better market conditions and continued expense management efforts, according to Fitch Ratings.

BAC's total revenue expanded 4.5% from the sequential quarter but declined 7% from the year-ago quarter. Overall return on average assets (ROA) was 0.78% in 2Q16, up from 0.50% in the sequential quarter but down from 0.96% in the year-ago quarter. Similarly the company's return on average common equity (ROE) was 6.5% in 2Q16, up from 3.8% in the sequential quarter but down from 8.4% in the year-ago quarter.

While Fitch recognizes the favorable sequential improvement in BAC's operating performance, BAC's results remain below Fitch's estimate of the company's long-term cost of equity assumption of between 10%-12%. Fitch would view positively the company's ability to continue to consistently improve earnings to at least its estimate of BAC's cost of equity all while maintaining good capital and liquidity positions.

Reported net interest income (NII) was up slightly from the sequential quarter, but down from the year-ago quarter. The quarter NII included $1bn of negative market related adjustments. Similarly, overall non-interest income was up 8.1% from the sequential quarter due primarily to higher trading account profits amid incrementally better market conditions but down 2.7% from the year ago quarter, which had stronger investment banking income, mortgage banking income, and investment and brokerage services revenue.

BAC's Global Banking and Global Markets segments were the biggest drivers sequentially of revenue improvement. Global banking net revenue improved due to higher leasing and treasury related revenue as well as higher advisory fees. Fixed Income, Currency, & Commodities (FICC) drove the improvement in Global Markets due to stronger performance in mortgage, credit, and currencies amid more favorable trading conditions and higher market volatility.

BAC's has continued to push down expenses, which has improved operating performance. Overall expenses declined 8.9% relative to the sequential quarter, which included payroll taxes and retirement eligible expenses, and 3.3% relative to the year-ago quarter.

Efforts to reduce expenses include a continued focus on digitizing the company's operations as well as continued headcount reductions in back and middle office functions.

Credit quality for BAC generally remains good. Overall net charge-offs improved in both the company's consumer and commercial loan portfolios. Additionally, BAC's criticized energy exposure has begun to stabilize as the company recently went through its oil price deck redetermination period. Many energy borrowers have also benefited from higher oil prices.

Overall provision expense declined $21mn relative to the sequential quarter due to improvements in consumer asset quality, partially offset by some reserve build due to loan growth, as well as holding the energy reserves unchanged at $1.0bn.

In Fitch's view, BAC's liquidity position remains sound with total deposits of $1.2 trillion and a Time to Required Funding (debt coverage at parent) of 35 months.

BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio improved under the advanced approaches to 10.5%. Given that the advanced approaches ratio is lower than standardized, it remains BAC's binding constraint.

While this CET1 ratio is below the average of some peer institutions, the denominator of the ratio does include a sizeable component of operational risk weighted assets (RWA). BAC performed relatively well under the Comprehensive Capital Analysis and Review (CCAR) stress test and did not receive an objection to its capital plan.

Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company. The bank level SLR is at 7.4%, well above the 6% minimum, and 6.9% at the parent company, well above the 5% requirement.