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Will BofA (BAC) Stock Continue to Rally Post Q4 Earnings?

Zacks Equity Research

Bank of America Corp. BAC is slated to release fourth-quarter and 2016 results on Friday, Jan 13, before the opening bell. Notably, of late, the company’s quarterly earnings estimates have been relatively stable. So, what to expect from the company in the upcoming earnings release?

Last quarter, improved fixed income trading revenues, investment banking fees and mortgage banking income along with efficient expense control helped BofA to surpass the Zacks Consensus Estimate. However, these were partially offset by weakness in equity trading revenues and higher credit costs.

The earnings beat along with growing optimism surrounding improvement in the operating backdrop translated into enhanced share price movement. For the three months ended Dec 31, BofA stock surged 41.2%.

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 Influence Q4 Results

Trading Revenues to Improve: At an industry conference in early December, the CEO, Brian Moynihan announced that fixed-income trading revenue is anticipated to increase more than 15%, during the quarter. Notably, we believe equity trading should also improve following the heightened volatility since the U.S.-Presidential election results.

Pressure on Net Interest Margin to Ease Slightly: Rise in the 10-year Treasury yield since Nov 8 is expected to alleviate pressure on net interest margin (NIM) to some extent. Though BofA increased its prime lending rate, subsequent to the Fed rate hike, the favorable impact on NIM is not likely to happen in the quarter.

Efficient Cost Control: In the absence of additional legal costs and provisions, operating expenses should remain stable in the quarter, given the success of BofA’s cost-saving efforts and other restructuring initiatives. Management expects core expenses to be around $13 billion during the quarter.

Easing Energy Concerns: With gradual rebound in oil prices, BofA is not expected to witness any substantial rise in provision for credit losses related to energy-sector loans. Nevertheless, this is likely to weigh on the company’s overall asset quality to some extent.

Investment Banking Fees Slump: Per the Thomson Reuters data, BofA is likely to report a decline in investment banking fees in the quarter, on a year-over-year basis. Lackluster performance in M&As as well as equity and debt underwriting is largely responsible for the fall in investment banking fees.

Weak Mortgage Operations: A significant increase in mortgage rates during the quarter should have an adverse impact on BofA’s mortgage banking revenues. Both fresh originations and refinancing are expected to have suffered due to higher mortgage rates.

Earnings Whispers

Chances of BofA beating the Zacks Consensus Estimate in the fourth quarter are less. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) 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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 38 cents.

Zacks Rank: BofA’s Zacks Rank #1 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Additionally, the estimate for the upcoming release indicates a year-over-year growth of about 35.7%.

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.

JPMorgan Chase & Co. JPM is scheduled to report results on Jan 13. It has an Earnings ESP of +0.70% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Citigroup Inc. C has an Earnings ESP of +3.60% and it carries a Zacks Rank #2. The company is slated to release results on Jan 13.

The Earnings ESP for The PNC Financial Services Group, Inc. PNC is +1.61% and it carries a Zacks Rank #2. The company is scheduled to release results on Jan 13.

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