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Slump in Trading Activities to Hurt BofA (BAC) Q3 Earnings?


The expected fall in Bank of America Corp.’s BAC trading income will adversely impact its third-quarter earnings, slated on Friday, Oct 13. However, the bank is anticipated to record year-over-year growth in earnings and revenues.

BofA’s performance in the last quarter reflected improved investment banking fees and higher net interest income while trading income witnessed a slump. The same tough operating backdrop continued in the third quarter as well.

Earnings estimate revisions depict pessimism too. The Zacks Consensus Estimate for the to-be-reported quarter was revised 1.1% downward over the last 30 days.

Earnings Whispers

Decrease in earnings estimates increase chances of a beat. However, our quantitative model doesn’t conclusively predict an earnings beat this time. Here’s why:

BofA does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing chances of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for BofA is -0.66%.

Zacks Rank: BofA’s Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Nonetheless, the Zacks Consensus Estimate reflects 10.8% improvement on a year-over-year basis. Further, BofA has a decent surprise history, as evident from the chart below:

Bank of America Corporation Price and EPS Surprise

Bank of America Corporation Price and EPS Surprise | Bank of America Corporation Quote

Factors to Impact Q3 Results

Trading slump: The third quarter appears to be disappointing for BofA in terms of trading business similar to the prior quarter. In September, the bank’s chief financial officer, Paul Donofrio projected nearly 15% year-over-year decline in trading income. Similar to the last quarter, slump in fixed-income revenues is expected to be the primary reason for this decline.

While the fall is largely attributable to higher-than-usual volatility in the year-ago quarter, trading activities remained sluggish in the third quarter. Absence of any tangible development on the proposed reforms by the Trump administration and an unchanged monetary policy of the Fed were the main reasons for reduced volatility for the major part of the quarter.

Investment banking to offer some support: Given the higher debt originations during the quarter (mainly on expectation of persistent rise in interest rates), debt underwriting fees are expected to continue rising in the to-be-reported quarter. However, overall low volumes of M&A and equity issuance during the quarter are expected to result in a decline in the related fees. But as BofA is one of the leading players in this space, it might not suffer a significant loss.

Mortgage revenues not to be a major support: An expected higher rate environment might have led to a rise in demand for refinancing activities during the quarter, thus helping BofA record some mortgage revenues. However, with the refinance boom nearing its end, no big support is expected from this segment. So, the contribution of mortgage revenues to total revenues will not be much.

Slight rise in net interest income (NII) on modest loan growth: Improvement in loan demand, particularly commercial and industrial, and consumer loans during quarter is expected to support NII. Further, management expects NII to increase sequentially, assuming realization of the forward curve and modest growth in loans and deposits. Nonetheless, the sale of non-U.S. consumer credit card operation will have a marginal negative impact.

Reduced scope for cost control: Expense reduction, which has long been the main method to remain profitable, is not expected to be the primary support this quarter. But given the success of BofA’s cost-saving efforts and other restructuring initiatives as well as absence of significant legal costs and provisions, overall expenses should remain more or less stable.

Stocks to Consider

Here are a few major bank stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The PNC Financial Services Group, Inc. PNC is scheduled to report results on Oct 13. It has an Earnings ESP of +0.07% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comerica Incorporated CMA has an Earnings ESP of +0.68% and a Zacks Rank #3. It is scheduled to report third-quarter 2017 results on Oct 17.

The Earnings ESP for SunTrust Banks, Inc. STI is +0.09% and it carries a Zacks Rank #3. The company is scheduled to release results on Oct 20.

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