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Trading, Loans, Higher Rates to Aid BofA's (BAC) Q4 Earnings

Zacks Equity Research

Similar to the first three quarters of 2018, the fourth quarter witnessed significant volatility and rise in client activity. Hence, Bank of America’s BAC trading revenues are expected to improve. As trading revenues are an important part of the bank’s top line, this will likely support its results slated on Jan 16.

Several major developments — including the further escalation of U.S.-China trade war, Brexit-related uncertainty, fears of global economic slowdown, changing yield curve and the Federal Reserve’s stance related to interest rate hikes — incited volatility during the fourth quarter. Thus, this led to a rise in client activity and kept trading desks busy.

Additionally, at an investors’ conference in early December 2018, BofA’s CEO Brian Moynihan stated that the company’s capital markets revenues are likely to rise year over year in the fourth quarter.

Here are some other factors that are expected to impact BofA’s fourth-quarter results:

Decent net interest income growth: A marginal improvement in lending scenario — mainly in the areas of commercial and industrial, commercial real estate and consumer — is expected to result in an increase in net interest income (NII). Rise in interest rates will also offer some support amid flattening of the yield curve and steadily increasing deposit betas in the fourth quarter.

Further, the consensus estimate for average interest earning assets of $1.98 trillion for the fourth quarter reflects a rise of 1.8% on a year-over-year basis. This, along with decent lending activities, is expected to further lead to a rise in BofA’s NII in the to-be-reported quarter.

Notably, management expects NII, on an FTE basis, to decrease nearly $120 million owing to the tax act.

Management anticipates NII growth in 2018 to be solid, driven by loan and deposit growth as well as net interest yield expansion, partially offset by absence of NII from the U.K. card business that was sold in 2017.

Muted investment banking performance: Seasonality, fears of global economic slowdown, increased volatility and rise in interest rates hurt investment banking revenues in the fourth quarter. So, BofA’s equity underwriting fees and debt origination fees (accounting for nearly 40% of total investment banking fees) are expected to be adversely impacted.

Also, decline in global M&A deals in the fourth quarter will likely hurt the company’s advisory fees marginally. Nonetheless, strong M&A deal pipeline over the prior quarters will likely provide respite in the to-be-reported quarter. This, along with BofA being one of the leading players in this space, will likely lead to a slight improvement in advisory revenues.

Mortgage banking to disappoint: With the refinance boom almost coming to end and interest rates rising, a significant support is not expected from this business. Also, home equity loan portfolio is likely to decline in the to-be-reported quarter as mortgage rates continued to move higher. As BofA hasn’t bulked up its mortgage banking businesses since the last recession, mortgage banking is not expected to be a big help for the company.

Scope of cost control lower: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be the primary support for BofA in the to-be reported quarter. Further, as the company continues to digitize banking operations, upgrade technology and plans to expand into newer markets, related costs are expected to rise.

But given the success of BofA’s cost-saving efforts and other restructuring initiatives as well as absence of significant legal costs and provisions, overall operating expenses are likely to remain manageable in the fourth quarter.

Notably, the bank remains on track to reach its expense target of nearly $53 billion by 2018.

Here is what our quantitative model predicts:

BofA does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing 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 -1.06%.

Zacks Rank: BofA carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of the earnings beat.

Bank of America Corporation Price and EPS Surprise


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

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

Stocks to Consider

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

The Earnings ESP for JPMorgan JPM is +0.03% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jan 15.

U.S. Bancorp USB is scheduled to release results on Jan 16. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.15%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation BBT is scheduled to release results on Jan 17. It has an Earnings ESP of +0.64% and a Zacks Rank #3.

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