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Improved Trading, Higher Rates to Aid BofA (BAC) Q1 Earnings


After three consecutive quarters of witnessing muted activities, volatility is back in the market. This is expected to result in improvement in Bank of America’s BAC trading revenues in first-quarter 2018. As trading revenues constitute an important part of the bank’s top line, this is expected to lead the company to report improved results on Apr 16.

In the last two months of the first quarter, the markets experienced considerable volatility. In fact, February was one of the most volatile months since 2008, and March 2018 was even worse. The trade war between the United States and China, higher inflation expectation, tightening of monetary policy by the Fed and a sharp sell-off in the tech sector incited volatility during the quarter.

Also, the Zacks Consensus Estimate for Global Markets segment (under which trading revenues are accounted for) revenues of $4.64 billion reflects a jump of 36.8% from the prior quarter.

Here are the other factors that are likely influence BofA’s Q1 results:

Steady improvement in net interest income: In addition to higher interest rates, a moderate improvement in lending — particularly in the areas of commercial and industrial, real estate and consumer — will likely result in an increase in net interest income (NII).

Moreover, the Zacks Consensus Estimate for average interest earning assets of $1.96 trillion for the first quarter indicates a marginal sequential improvement. This, along with decent lending activities and higher interest rates, is projected to further boost BofA’s NII in the quarter.

Management expects NII, in the first quarter, to benefit from the rate hike in December 2017. This is expected to be partially offset by two less days in the quarter (lowering NII by $175 million) and seasonal decline in card loans. On an FTE basis, NII is anticipated to decline nearly $120 million owing to the tax act.

Investment banking performance to be muted: The trend of pocketing solid advisory and underwriting fees for debt and equity issuance may reverse to some extent in the to-be-reported quarter, as rising rates are likely to have slowed down corporates’ involvement in these activities. As debt origination fees account for a major portion of total investment banking fees for BofA, this is expected to have an adverse impact on investment banking revenues.

However, strong equity issuances globally are expected to have boosted IPOs and follow-on offerings. So, the related fees are projected to increase for BofA. Also, a potential rise in fees from increasing M&As in certain sectors will likely lead to a slight rise in advisory revenues for the company.

For BofA, investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment revenues of $5 billion reflects a marginal decline on a sequential basis.

Slowdown in mortgage banking: With the refinance boom nearing its end, a big help is not expected from this operation. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter as mortgage rates continued to move upward. As BofA hasn’t bulked up its mortgage banking businesses since the last recession, the company is expected to witness muted growth in the same.

The Zacks Consensus Estimate for the Consumer Banking segment (under which mortgage fees are accounted for) revenues of $8.91 billion shows a slight fall from the prior quarter.

Reduced scope of cost control: Expense reduction, which has long been the main method to remain profitable, is not expected to be the primary support in the to-be reported quarter. Further, as BofA continues to digitize banking operations and upgrade technology, related costs are expected to rise.

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 operating expenses are likely to remain relatively stable.

Here is what our quantitative model predicts:

BofA does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds 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 -0.31%.

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

Bank of America Corporation Price and EPS Surprise

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

Notably, the Zacks Consensus Estimate for earnings of 59 cents reflects 43.9% growth on a year-over-year basis. Also, the consensus estimate for sales of $22.9 billion shows 3% rise from the prior-year quarter.

Stocks to Consider

Here are a few major bank stocks that you may want to consider, as our model shows that these have the right combination of elements for an earnings beat this time around:

Comerica Incorporated CMA is scheduled to release results on Apr 17. It has an Earnings ESP of +1.16% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation BBT is slated to release results on Apr 19. It has an Earnings ESP of +1.37% and carries a Zacks Rank #3.

The Bank of New York Mellon Corporation BK has an Earnings ESP of +1.81% and carries a Zacks Rank of 3. The company is also slated to release results on Apr 19.

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