IB, lending and stock trading to support BofA (BAC) Q4 earnings

After witnessing robust client activity and market volatility in recent quarters, market normalization and lower volatility (compared to prior year period) in Q4 2021 should have mitigated Bank of Americato some extent the commercial activity of BAC. So, trading revenue shouldn’t provide much support for the company’s next earnings release, which is expected to be announced on Jan. 19, before the market opens.

As in previous quarters, the major indices – the S&P 500, Dow Jones and Nasdaq – rallied in the fourth quarter, with all three hitting new highs. Additionally, concerns about accelerating coronavirus infections across the globe, steadily rising inflation, fading fiscal stimulus, and the Federal Reserve’s hawkish monetary stance weighed on investor sentiment.

These factors led to increased equity market volatility during the fourth quarter. On the other hand, bond trading remained decent during the October-December quarter.

Zacks’ consensus estimate for equity trading revenue of $1.41 billion suggests a 6.9% increase from the reported figure for the prior year quarter. The consensus estimate for fixed income trading revenue of $1.73 billion indicates an increase of 2.4%. The consensus estimate for total trading revenue is set at $3.14 billion, implying growth of 4.4%.

Other key factors at play

Investment Banking (IB) Fees: As in recent quarters, deal closing continued at a healthy pace in Q4 2021, with deal volume and value seeing significant growth. This development is mainly due to the resumption of normal business activities, excess liquidity levels, the appetite of companies to increase their size and market share and a solid economic recovery. Therefore, BofA’s advisory fees were likely impacted positively.

Continued momentum in the IPO market and a steady increase in follow-on equity issuances could have supported equity underwriting costs in the quarter to report. Bond issuance volumes were modest. Thus, growth in BofA’s equity and debt issuance fees (representing nearly 40% of total IB fees) should have been decent.

The Zacks consensus estimate for IB fees of $2.04 billion indicates a 9.4% increase from the previous year’s level.

Net interest income (NII): Credit activities continued to improve in the fourth quarter. According to the latest data from the Fed, demand for commercial and industrial loans, home loans and consumer loans accelerated in October and November. Still, high levels of repayments and repayments and fierce loan pricing competition have likely hurt BofA’s loan volumes. This, combined with a persistently low interest rate environment, should have negatively impacted its NII and net interest yield during the quarter.

Zacks’ consensus estimate for NII on an FTE base of $11.4 billion suggests growth of 9.6% over the number reported the previous year.

Management continues to expect the quarterly NII to be around $11.3 billion. This is based on the assumptions of the materialization of the forward yield curve, economic recovery, investment of more excess cash in securities, a slight decline in amortization related expenses premiums and modest loan growth, partially offset by lower interest income from PPP loans.

Expenses: Although the bank continues to digitize its operations, upgrade technology and expand into new markets by opening branches resulting in increased related costs, its past efforts to improve operational efficiency have likely resulted in manageable spending levels in the reportable quarter.

Management expects fourth quarter operating expenses to be flat or slightly down on a sequential basis and to be around $14 billion. For 2021, it is expected to reach nearly $56.5 billion.

Asset quality: Continuing the trend of recent quarters and driven by the improving macroeconomic backdrop and stable credit market conditions, BofA likely released the reserves it had taken to cover losses from the effects of the coronavirus pandemic.

As the economic outlook and remaining uncertainties continue to improve, management expects reserve levels to continue to decline. With respect to card losses, given the continued low level of late-stage defaults in the 180-day pipeline, card losses are expected to decline in the fourth quarter of 2021.

The Zacks consensus estimate for non-performing loans of $4.73 billion implies a decline of 4.5%.

What the Zacks Model Reveals

Our proven model does not predict an earnings beat for BofA this time around. That’s because he doesn’t have the right combination of two key ingredients – a positive Revenue ESP and Zacks Rank #3 (Hold) or better – to increase the chances of a Revenue Beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: The earnings PSE for BofA is -0.66%.

Zack’s Ranking: He currently wears a Zacks Rank #3.

Bank of America Corporation course and surprise EPS

Bank of America Corporation course and surprise EPS

Bank of America Corporation price-eps-surprise | Quote from Bank of America Corporation

Zacks’ consensus estimate for fourth-quarter earnings is pegged at 76 cents, which has seen a 1.3% downward revision over the past seven days. Nevertheless, the estimated figure suggests a growth of 28.8% compared to the number reported a year ago.

Additionally, the consensus revenue estimate of $22.08 billion indicates a 9.9% increase.

Banks worth a look

Here are a few bank stocks you might want to consider, as our model shows they have the right mix of elements to show a better result this time around:

PNC Financial Services Group, Inc. PNC is scheduled to release its fourth quarter and full year 2021 results on January 18. PNC, who currently wears a Zacks rank #3, has an ESP profit of +2.29%.

PNC Financial’s quarterly earnings estimates fell slightly over the past month.

Bancshares Trading CBSH is expected to announce its fourth quarter and full year 2021 results on January 19. CBSH currently has a Zacks #3 ranking and an Earnings ESP of +1.24%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CBSH’s earnings estimates for the quarter to report moved north 3.3% in the 30 days.

United Bank BKU is expected to release its earnings on January 21. BKU, currently carrying Zacks rank #2 (Buy), has an Earning ESP of +42.98%.

The Zacks consensus estimate for BankUnited’s fourth-quarter earnings was unchanged over the past month.

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Bank of America Corporation (BAC): Free Stock Analysis Report

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