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Fee Income Woes to Hurt BofA (BAC) Despite Higher Rates

Bank of America’s BAC over-dependence on trading revenues is a key concern. The volatile nature of the capital markets might adversely impact its fee income growth.

Analysts are not optimistic regarding the company’s earnings growth potential. Over the past 60 days, the Zacks Consensus Estimate for BofA’s current-year earnings has been revised marginally lower.

Bank of America’s over-dependence on the capital market performance to generate fee income is concerning. Though the significant rise in market volatility and client activity amid the coronavirus-led mayhem provided substantial support to the company’s trading performance in 2020 and most of 2021, the trend began to reverse, starting fourth-quarter 2021, as markets began to normalize.

Trading revenues (constituting almost 20% of the company’s total net revenues) witnessed a year-over-year decline in the first quarter of 2022 despite higher volatility. Although trading revenues improved in the second quarter, the performance of the trading business remains uncertain because of the volatile nature of the capital markets.

Nevertheless, given the recent rate hikes, along with expectations of several more this year, BAC is expected to witness growth in net interest income and net interest yield in the near term.

BAC continues to align its banking centers based on customer needs. The bank is on track to open 500 centers in new cities and redesign 2,500 centers with technology upgrades. The company is opening fully automated branches featuring ATMs and video conferencing facility, allowing customers to communicate with off-site bankers. The initiatives enabled the company to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards.

Prudent expense management continues to support Bank of America’s financials. Its expense-saving plan — Project New BAC (launched in 2011) — helped improve overall efficiency and save as much as $8 billion in operating expenses annually till the end of 2014.

Though total non-interest expenses rose 8.2% in 2021 and marginally in the first six months of 2022 (because of continued investments in technology and people across businesses, while adding new financial centers in the expansion and growth markets), costs are expected to be manageable in the quarters ahead.

Stocks to Consider

A couple of stocks from the finance space worth a look at are S&T Bancorp, Inc. STBA and Arrow Financial Corporation AROW.

The consensus estimate for S&T Bancorp and Arrow Financial’s current-year earnings has been revised upward over the past 60 days.

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Bank of America Corporation (BAC) : Free Stock Analysis Report
S&T Bancorp, Inc. (STBA) : Free Stock Analysis Report
Arrow Financial Corporation (AROW) : Free Stock Analysis Report
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