Will a Challenging Backdrop Hurt BofA (BAC) Q1 Earnings?

Bank of America Corp. BAC is slated to release first-quarter 2016 results on Thursday, Apr 14, before the opening bell.

Driven by lower expenses and stabilizing revenue growth, BofA’s results had surpassed the Zacks Consensus Estimate in the last quarter. However, a rise in provision for loan losses as well as weakness in equity trading income and investment banking fees dampened the bottom-line growth to some extent.

So, how will BofA perform this earnings season? Will it be able to maintain its earnings streak or succumb to a tough operating environment? Let’s see how things have turned up prior to this announcement.

The Zacks Consensus Estimate for BofA has been witnessing a constant downward revision in the last 60 days. Moreover, the estimate of 22 cents per share for the upcoming release indicates a year-over-year decline of about 18.52%.

Likewise, our quantitative model does not predict an earnings beat. Here is what it indicates:

Chances of BofA beating the Zacks Consensus Estimate in the first quarter are quite low. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

Zacks ESP: The Earnings ESP for BofA is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 22 cents.

Zacks Rank: BofA’s Zacks Rank #5 (Strong Sell) further decreases the predictive power of ESP.

Factors to Impact Results

Similar to the last couple of quarters, BofA will witness a slump in trading revenues in the first quarter. Extreme volatility in the equity markets in the first two months of 2016 and tumbling commodity prices led to low-level client activity. Though March witnessed a slight uptick, this was not enough to mitigate the decreases in the prior two months. Therefore, equity trading income should be down.

Concerns over Chinese slowdown, plunging oil prices and a low rate environment continued to weigh on investor sentiments. Apart from these, fixed income trading is projected to show a downtrend owing to the increased regulations and need to maintain higher capital levels.

Additionally, concerns mentioned above had an adverse impact on equity and debt underwriting during the quarter. Further, per Dealogic data, initial public offering (IPO) volume in the first quarter plunged 74% year-over-year.

Moreover, Dealogic noted that following three consecutive year over year increases, overall M&As revenue for the finance sector was down 24% in the first quarter to $4.4 billion. Hence, BofA’s investment banking revenues are set to fall in the first quarter.

Apart from this, lower loan demand will lead to a fall in mortgage banking income. Further, despite management expectation for a rise in core net interest income on a sequential basis, lower loan demand and global growth concerns will weigh on the top line.

Also, given the significant exposure in energy-sector lending (4.6% of total commercial credit exposure as of Dec 31, 2015), BofA will witness a rise in provision for loan losses in the quarter. Management expects net charge-offs within $800–$900 million range in the first quarter, while overall reserve releases will be moderate.

Nonetheless, BofA is projected to record negligible legal charges in the first quarter as well. Further, with no major litigation issues in sight, the company is not expected to make any substantial addition to legal reserve during the quarter.

Notably, in first quarter of 2016, operating expenses will include nearly $1 billion of retirement eligible incentives. Also, the quarter will record seasonally higher payroll tax of $300 million. However, in absence of additional legal costs and provisions, operating expenses should remain stable in the quarter, aided by success of its cost-savings plan – Project New BAC – and other restructuring initiatives.

Nonetheless, stable expenses are not expected to mitigate the pressure on revenue growth. As a result, the bottom line is projected to decline from the prior year.

Further, BofA’s activities during the quarter were inadequate to win analysts’ confidence. This led the Zacks Consensus Estimate to plunge 12% to 22 cents per share over the last 7 days.

Stocks to Consider

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

BlackRock, Inc. BLK has an Earnings ESP of +1.85% and a Zacks Rank #2. The company will announce results on Apr 14.

The Earnings ESP for People's United Financial Inc. PBCT is +4.76% and it carries a Zacks Rank #3. The company is slated to release results on Apr 21.

Affiliated Managers Group Inc. AMG has an Earnings ESP of +1.40% and a Zacks Rank #2. It is expected to report on Apr 26.

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