Bank of America 2006 Annual Report Download - page 72

At December 31, 2006 and 2005, we had net notional credit default
protection purchased in our credit derivatives portfolio of $8.3 billion and
$14.7 billion. The net cost of credit default protection, including
mark-to-market impacts, resulted in net losses of $241 million in 2006
compared to net gains of $49 million in 2005. Losses in 2006 primarily
reflected the impact of credit spreads tightening across most of our hedge
positions. The average Value-at-Risk (VAR) for these credit derivative
hedges was $54 million and $69 million for the twelve months ended
December 31, 2006 and 2005. The decrease in VAR was driven by a
decrease in the average amount of credit protection outstanding during the
period. There is a diversification effect between the credit derivative
hedges and the market-based trading portfolio such that their combined
average VAR was $57 million and $62 million for the twelve months ended
December 31, 2006 and 2005. Refer to the discussion on page 76 for a
description of our VAR calculation for the market-based trading portfolio.
Table 20 Commercial Credit Exposure and Net Credit Default Protection by Industry (1)
December 31
Commercial Utilized
Total Commercial
Committed
Net Credit Default
Protection
(2)
(Dollars in millions) 2006 2005 2006 2005 2006 2005
Real estate (3) $ 49,208 $ 47,580 $ 73,493 $ 70,373 $ (704) $ (1,305)
Diversified financials 24,802 24,975 67,027 64,073 (121) (250)
Retailing 27,226 25,189 44,064 41,967 (581) (1,134)
Government and public education 22,495 19,041 39,254 33,350 (25) –
Capital goods 16,804 15,337 37,337 33,004 (402) (741)
Banks 26,405 21,755 36,735 30,811 (409) (315)
Consumer services 19,108 17,481 32,651 29,495 (433) (788)
Healthcare equipment and services 15,787 13,455 31,095 25,494 (249) (709)
Individuals and trusts 18,792 16,754 29,167 24,348 3 (30)
Materials 15,882 16,754 28,693 28,893 (630) (1,119)
Commercial services and supplies 15,204 13,038 23,512 21,152 (372) (472)
Food, beverage and tobacco 11,341 11,194 21,081 20,590 (319) (580)
Media 8,659 6,701 19,056 15,250 (871) (1,790)
Energy 9,350 9,061 18,405 17,099 (236) (589)
Utilities 4,951 5,507 17,221 15,182 (362) (899)
Transportation 11,451 11,297 17,189 16,980 (219) (323)
Insurance 6,573 4,745 14,121 13,868 (446) (1,493)
Religious and social organizations 7,840 7,426 10,507 10,022 – –
Consumer durables and apparel 4,820 5,142 9,117 9,318 (170) (475)
Technology hardware and equipment 3,279 3,116 8,046 7,171 (38) (402)
Telecommunication services 3,513 3,520 7,929 9,193 (1,104) (1,205)
Pharmaceuticals and biotechnology 2,530 1,675 6,289 4,906 (181) (470)
Software and services 2,757 2,573 6,206 5,708 (126) (299)
Automobiles and components 1,529 1,602 5,098 5,878 (483) (679)
Food and staples retailing 2,153 2,258 4,222 4,241 (116) (324)
Household and personal products 720 536 2,205 1,669 50 75
Semiconductors and semiconductor equipment 802 536 1,364 1,119 (18) (54)
Other 6,396 2,503 6,825 2,926 302
(4)
1,677
(4)
Total $340,377 $310,751 $617,909 $564,080 $(8,260) $(14,693)
(1) December 31, 2005 industry balances have been reclassified to reflect the realignment of industry codes utilizing Standard & Poor’s industry classifications and internal industry management.
(2) Net notional credit default protection purchased is shown as negative amounts and the net notional credit protection sold is shown as positive amounts.
(3) Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based upon the borrowers’ or counterparties’ primary business activity using
operating cash flow and primary source of repayment as key factors.
(4) Represents net credit default swaps index positions, including tranched index exposure, which were principally investment grade. Indices are comprised of corporate credit derivatives that trade as an aggregate index value.
Generally, they are grouped into portfolios based on specific ratings of credit quality or global geographic location. As of December 31, 2006 and 2005, credit default swap index positions were sold to reflect our view of the
credit markets.
Tables 21 and 22 present the maturity profiles and the credit
exposure debt ratings of the net credit default protection portfolio at
December 31, 2006 and 2005.
Table 21 Net Credit Default Protection by Maturity
Profile
December 31
2006 2005
Less than or equal to one year 7% –%
Greater than one year and less than or equal to five years 46 65
Greater than five years 47 35
Total 100% 100%
Table 22 Net Credit Default Protection by Credit
Exposure Debt Rating (1)
(Dollars in millions) December 31, 2006 December 31, 2005
Ratings Net Notional Percent Net Notional Percent
AAA $ (23) 0.3% $ (22) 0.2%
AA (237) 2.9 (523) 3.6
A (2,598) 31.5 (4,861) 33.1
BBB (3,968) 48.0 (8,572) 58.2
BB (1,341) 16.2 (1,792) 12.2
B (334) 4.0 (424) 2.9
CCC and below (50) 0.6 (149) 1.0
NR
(2)
291 (3.5) 1,650 (11.2)
Total $(8,260) 100.0% $(14,693) 100.0%
(1) In order to mitigate the cost of purchasing credit protection, credit exposure can be added by selling
credit protection. The distribution of debt rating for net notional credit default protection purchased is
shown as negative amounts and the net notional credit protection sold is shown as positive amounts.
(2) In addition to unrated names, “NR” includes $302 million and $1.7 billion in net credit default swaps
index positions at December 31, 2006 and 2005. While index positions are principally investment grade,
credit default swaps indices include names in and across each of the ratings categories.
70 Bank of America 2006