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Soft Investment Banking to Hurt BofA's (BAC) Earnings in Q4

Zacks Equity Research

The performance of investment banking, one of the primary sources of revenues for Bank of America BAC, is expected to be dismal in fourth-quarter 2018. Therefore, this will likely have some adverse impact on the bank’s results, scheduled on Jan 16.

Investment banking income basically comprises underwriting revenues (equity and debt) and advisory fees. So, let’s check how these are likely to perform in the to-be-reported quarter.

Seasonality hurt investment banking revenues in the fourth quarter. Fears of global economic slowdown and increased volatility weighed on companies’ plans to raise capital by issuing shares. Thus, BofA’s equity underwriting fees are expected to remain soft.

Further, rise in interest rates is likely to have slowed down companies’ involvement in debt issuance activities. As debt origination fees account for roughly 40% of total investment banking fees for BofA, this is expected to have an adverse impact on debt underwriting income.

Further, decline in global M&A deals in the fourth quarter will likely hurt the company’s advisory fees to an extent. Volatile markets and increase in borrowing costs are some of the key reasons that hampered deal making activities. Nevertheless, strong M&A deal pipeline over the prior quarters and BofA being one of the leading players in this space are likely provide the bank some leverage.

Overall Earnings & Revenue Projections

Notably for BofA, the Zacks Consensus Estimate for earnings of 63 cents reflects a 34% increase on a year-over-year basis. However, the consensus estimate for sales of $22.2 billion indicates a 8.7% rise from the prior-year quarter.

Bank of America Corporation Price and EPS Surprise

 

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

Click here to know about the other factors that are likely to influence BofA’s overall results.

Our Take

Amid tough operating environment, disappointing investment banking performance is expected to adversely impact BofA’s top line to an extent. Further, dismal mortgage banking remains a concern.

Nonetheless, decent loan growth and higher interest rates will aid revenues. Also, trading revenues are expected to lend some support to this Zacks Rank #3 (Hold) stock’s earnings.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Earnings Schedules of Other Major Banks

BB&T Corporation BBT and KeyCorp KEY are scheduled to release fourth-quarter results on Jan 17 while SunTrust Banks, Inc. STI is slated to report on Jan 18.

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