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Modest Loan Demand, Equity Trading to Aid BofA (BAC) Q3 Earnings

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Bank of America BAC is expected to have recorded weak trading performance in the third quarter of 2021. Unlike the prior quarters, wherein significant market volatility and client activity aided trading revenues, market normalization and reduced volatility are expected to have dampened the same this time around. Thus, the company’s trading revenues are less likely to offer much support to its upcoming results, slated to be announced on Oct 14, before market open.

The quarter had begun on a positive note. However, various concerns including the rising coronavirus infections, renewed inflation fears, signs of a slowdown in China, possibilities of an increase in corporate tax rates, diminishing fiscal stimulus, and the Federal Reserve’s unwinding of bond purchases soon weighed on investor sentiments. Concerns related to the financial fallout of the potential failure of China’s Evergrande property group and debates over the debt ceiling also made investors jittery.

These factors resulted in a heightened level of equity market volatility during the last few weeks of the third quarter. On the contrary, bond trading remained weak in the June-September quarter.

The Zacks Consensus Estimate for equity trading revenues of $1.51 billion suggests an increase of 25.3% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.85 billion indicates a fall of 8.2%. The consensus estimate for total trading revenues is pegged at $3.36 billion, reflecting a rise of 4.3%.

Other Major Factors at Play

Investment Banking (IB) Fees: Similar to the past several quarters, deal-making continued at a robust pace in third-quarter 2021, with both deal volume and value witnessing significant growth. This was primarily driven by the resumption of normal business activities, excess liquidity levels, companies’ appetite for strengthening scale and market share, and solid economic recovery. Hence, BofA’s advisory fees are likely to have been positively impacted.

Continued momentum in the IPO market and a steady rise in follow-up equity issuances are likely to have offered support to equity underwriting fees in the to-be-reported quarter. Bond issuance volumes were modest. Thus, growth in BofA’s equity underwriting and debt origination fees (accounting for almost 40% of total IB fees) is expected to have been decent.

BofA’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.15 billion indicates a fall of 3% from the prior-year level.

Net Interest Income (NII): Unlike the prior few quarters, loan demand marginally improved in the third quarter. Per the Fed data, demand for real estate and consumer loans increased while commercial and industrial loan demand was muted. The persistently low interest rate environment remained a concern.

Nonetheless, steepening of the yield curve (the difference between short and long-term interest rates) and modest rise in demand for loans are expected to have provided some support to BofA’s net interest yield and NII during the quarter.

Expenses: Though the bank continues to digitize operations, upgrade technology and expand into newer markets by opening branches leading to higher related costs, its prior efforts to improve operating efficiency are likely to have resulted in manageable expense levels in the to-be-reported quarter.

Management expects third-quarter 2021 operating expenses to decline on a sequential basis and be around $14 billion.

Asset Quality: Continuing with the trend of the last four quarters and driven by improving macroeconomic backdrop and stable credit market conditions, BofA is likely to have released reserves that it had taken to cover losses from the effects of the coronavirus pandemic. This is expected to have supported the company’s earnings in the to-be-reported quarter.

As the economic outlook and remaining uncertainties continue to improve, management expects reserve levels to keep moving lower. Further, given the continued low level of late-stage delinquencies in the 180-day pipeline, card losses are expected to have declined in the third quarter of 2021. Also, total net-charge offs are likely to be around the second-quarter level due to lower card losses partly offset by a fall in net recoveries and other products.

The Zacks Consensus Estimate for non-performing assets is pegged at $4.91 billion for the to-be-reported quarter, which indicates a rise of 3.9% from the prior-year quarter’s reported figure. The consensus estimate for non-performing loans of $4.79 billion implies a 5.3% rise.

What the Zacks Model Unveils

Our proven model shows that BofA has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat this time around.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for BofA is +0.69%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

Bank of America Corporation Price and EPS Surprise

Bank of America Corporation Price and EPS Surprise
Bank of America Corporation Price and EPS Surprise

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

The Zacks Consensus Estimate for earnings is pegged at 71 cents, which has witnessed an upward revision of 1.4% over the past seven days. The estimated figure reflects growth of 39.2% from the year-ago reported number.

Also, the consensus estimate for revenues of $21.73 billion indicates a 6.9% rise.

Other Banks That Warrant a Look

Here are few other bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for PNC Financial PNC is +2.17% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Oct 15.

Zions Bancorporation ZION is slated to report quarterly results on Oct 18. The company has an Earnings ESP of +2.49% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fifth Third Bancorp FITB is slated to report quarterly earnings on Oct 19. The company, which carries a Zacks Rank of 2 (Buy) at present, has an Earnings ESP of +0.46%.

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

Fifth Third Bancorp (FITB) : Free Stock Analysis Report

The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report

Zions Bancorporation, N.A. (ZION) : Free Stock Analysis Report

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