Loans, trading to support BofA’s (BAC) Q1 earnings, IB to hurt
After witnessing the gradual normalization of trading activity over the past few quarters, trading revenue is expected to have surprisingly rebounded for Bank of America BAC in the first quarter of 2022. So trading revenue could provide some support for its results, which are expected to be announced on April 18, before the opening bell.
The first quarter began with expectations for trading volumes falling to levels seen during the pre-pandemic era after a stellar performance over the past two years. Yet the ongoing conflict between Russia and Ukraine and the prospect of multiple and larger rate hikes by the Federal Reserve to control runaway inflation have led to an increase in client activity and trading volume. during the quarter.
These developments have led to an increased level of volatility in both equity and bond markets. Thus, BAC is likely to have seen a solid improvement in trading revenue this time around.
Zacks’ consensus estimate for equity trading revenue of $1.63 billion suggests a 20.2% increase from the figure reported in the prior quarter. The consensus estimate for fixed income trading revenue of $2.53 billion indicates a jump of 60.5%. The consensus estimate for total trading revenue is set at $4.15 billion, implying a 41.5% increase.
Other major factors
Loan Application and Net Interest Income (NII): Credit activities continued to improve in the first quarter. According to the latest data from the Fed, demand for commercial and industrial loans, home loans and consumer loans has accelerated. In addition, BofA’s net interest yield and the NII were likely positively impacted by the Fed’s 25 basis point interest rate hike in mid-March.
The Zacks consensus estimate for BAC’s average interest income assets is pegged at $2.78 trillion, suggesting a 1.1% increase from the prior quarter’s reported figure.
Still, the first quarter is generally slow for loan originations, which together with the flattening of the yield curve (the difference between short- and long-term interest rates) likely hampered net interests of BofA. Also, fewer days in the trimester likely hurt NII.
The Zacks consensus estimate for NII on an FTE basis of $11.7 billion suggests a 1.8% increase on a sequential basis.
Management expects two headwinds – two days less interest accrual and fewer PPP fees – to hurt NII by $250 million in the first quarter. Nonetheless, NII will be “up about a few hundred million” sequentially.
Investment Banking (IB) Fees: After an astonishing performance for nearly two years, deal making came to a screeching halt in March. The ongoing conflict between Russia and Ukraine (causing instability in stock markets around the world) and ambiguity over the inflation-linked economic slowdown weighed on business confidence. Thus, the volume of transactions and the total value experienced a decline during the first quarter. Therefore, BofA’s advisory fees are likely to have been adversely affected.
Given the aforementioned concerns, equity market performance has been disappointing and as a result, subsequent IPOs and equity issuances have dried up. On the other hand, bond issues were probably correct. BAC underwriting fees (representing nearly 40% of total IB fees) are expected to have been hit in the March quarter.
Zacks’ consensus estimate for IB revenue of $1.83 billion indicates a 22% decline from the prior quarter level.
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.
BAC expects high personnel costs of approximately $400 million and increased costs from seasonally higher sales and trading revenue.
Asset quality: Throughout 2021, BofA continued to release reserves it had taken to cover losses from the effects of the coronavirus pandemic. This has enormously supported the company’s profits. Now that the majority of the releases were made in the past year, the reserve releases are not expected to be much support for the company’s earnings in the quarter to report.
The Zacks consensus estimate for non-performing loans of $4.57 billion implies a sequential marginal increase.
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 ESP on wins and Zacks rank #3 (Hold) or better – to increase the chances of a beat 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 -0.39%.
Zack’s Ranking: BAC currently wears a Zacks Rank #3.
Bank of America Corporation course and surprise EPS
Bank of America Corporation price-eps-surprise | Quote from Bank of America Corporation
The Zacks consensus estimate for first-quarter earnings is pegged at 77 cents, which has seen a 1.3% downward revision in the past 30 days. Furthermore, the estimated figure suggests a 10.5% drop from the number reported a year ago.
The consensus sales estimate of $23.22 billion indicates an increase of 1.7%.
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 outperform this time around:
State Street STT is expected to release its first quarter 2022 results on April 14. The company, currently ranked 3 in Zacks, has an ESP on earnings of +0.80%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
STT’s quarterly earnings estimates rose 2.8% over the past month.
Bancshares Trading CBSH is expected to report its first quarter 2022 results on April 19. The company currently holds a Zacks rank #2 (buy) and an ESP earnings of +2.33%.
CBSH’s earnings estimates for the quarter to report moved north 3.5% in the 30 days.
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