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Trading, Investment Banking to Aid BofA (BAC) Q4 Earnings

Zacks Equity Research

Bank of America’s BAC fourth-quarter trading revenues are likely to have been driven by a rise in client activity. Trading revenues are an important part of the bank’s top line and are expected to have favorably impacted its earnings slated to be released on Jan 15.

Though several lingering matters like uncertainty related to the U.S.-China trade conflict and Brexit might have impacted trading activities in the quarter, positive developments in the same toward the end of the quarter and improving domestic economy are likely to have provided respite, resulting in upswing in client activities.

Besides, during an investor conference in December, CEO Brian Moynihan had stated that in the fourth quarter, trading revenues are likely to grow 7-8% year over year.

The Zacks Consensus Estimate for Global Markets segment’s (under which trading revenues are accounted for) net revenues also point in the same direction. Net revenues of $3.56 billion indicate a rise of 9.8% from the year-ago reported number.

Here are few other key factors that are likely to have influenced BofA’s fourth-quarter performance:

Moderate growth in investment banking (IB) fees: Though the number of closed deals declined during the fourth quarter, a higher number of announced M&As indicate a strong pipeline. Also, global deal value declined. Thus, BofA’s advisory fees are likely to have been negatively impacted. However, with the bank being one of the leading players in this space and its increased focus on M&A business, this must have provided some leverage.

On the other hand, solid equity market performance and the central banks’ accommodative stance drove corporates to issue equities across the globe. Moreover, bond issuance volumes were solid, while debt issuances were muted as corporate loan demand was weak. Hence, growth in BofA’s equity underwriting fees and debt origination fees (accounting for roughly 40% of total investment banking fees) are likely to have been decent in the fourth quarter.

At the investors' conference, management had projected IB revenues to rise 3-4% on a year-over-year basis.

BofA’s IB revenues are accounted in Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $5.05 billion suggests a slight decline.

Weak growth in net interest income (NII): An overall decent lending picture except for commercial and industrial during the fourth quarter is likely to have had a positive impact on BofA’s NII. However, decline in interest rates is also likely to have hurt to some extent.

The consensus estimate for average interest earning assets of $2.05 trillion for the fourth quarter indicates a rise of 3.4% from the year-ago reported figure.

For 2019, management had anticipated NII to be up nearly 1%, based on the assumption of flattish yield curve, three rate cuts this year, and modest loan and deposit growth. Further, core loan growth is anticipated to be in low-single digits.

Expenses to be manageable: Though the bank continues to digitize operations, upgrade technology and expand into newer markets by opening branches, leading to higher related costs, prior efforts to improve operating efficiency will likely result in manageable levels of expenses in the fourth quarter.

Management expects operating expenses for 2019 to be $53 billion.

Here is what our quantitative model predicts:

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 — that increase the odds of an earnings beat.

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 +0.12%.

Zacks Rank: BofA carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP.

Bank of America Corporation Price and EPS Surprise

The Zacks Consensus Estimate for earnings of 68 cents suggests 2.9% decline from the year-ago reported number. Also, the consensus estimate for sales of $22 billion indicates 3.2% decrease.

Other Major Banks That Warrant a Look

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

The Earnings ESP for JPMorgan JPM is +0.41% and it carries a Zacks Rank of 2. The company is scheduled to report quarterly numbers on Jan 14.

PNC Financial PNC is scheduled to release results on Jan 15. The company has an Earnings ESP of +0.55% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BNY Mellon BK is +0.36% and it carries a Zacks Rank of 2, currently. The company is scheduled to report earnings on Jan 16.

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Click to get this free report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report Bank of America Corporation (BAC) : Free Stock Analysis Report The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report To read this article on Zacks.com click here.