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Weak Loans, Normalized Trading to Hurt BofA (BAC) Q2 Earnings

Bank of America BAC is expected to have recorded weak trading performance in the second quarter of 2021. Unlike the prior five quarters wherein significant market volatility and client activity supported 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 major support to its upcoming results, slated to be announced on Jul 14, before market open.

Like the past few quarters, all major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the second quarter and touched new highs. However, low volatility might have affected equity volumes to some extent. The Federal Reserve’s bond-buying program is likely to have offered support to fixed-income trading volumes. Thus, BofA’s equity and fixed-income trading revenues are expected to have been decent during the to-be-reported quarter.

The Zacks Consensus Estimate for equity trading revenues of $1.49 billion suggests an increase of 23.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.44 billion indicates a fall of 17.1%. The consensus estimate for total trading revenues is pegged at $3.93 billion, reflecting a decline of 5.3%.

Other Key Factors

Net Interest Income (NII): Continuing the trend of the past several quarters, demand for loans (mainly commercial and industrial, and residential real estate loans per the Fed data) remained soft during the second quarter of 2021, while commercial real estate loan and consumer loan portfolios offered some support.

This, along with the low interest rates, is likely to have hurt BofA’s net interest yield and NII in the quarter, while modest steepening of the yield curve (the difference between short and long-term interest rates) might have offered some respite.

Investment Banking (IB) Fees: Similar to the past several quarters, deal making continued at a faster pace in second-quarter 2021 as both deal volume and value recorded substantial growth. This was primarily driven by robust macroeconomic expectations, proposed tax rate hikes by President Joe Biden, cash reserves and low interest rates. So, BofA’s advisory fees are likely to have been positively impacted.

Continued momentum in the IPO market and 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 also 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 in the second quarter.

BofA’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.47 billion indicates a fall of 12.3% from the prior-year level.

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 second quarter.

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

Asset Quality: Continuing with the trend of the last three quarters and driven by improving macroeconomic backdrop and stable credit market conditions, BofA is likely to have released reserves in the second quarter. This might have supported the company’s earnings in the to-be-reported quarter.

Management expects net charge-offs to decline sequentially, given positive delinquency trends.

The Zacks Consensus Estimate for non-performing assets is pegged at $5.35 billion for the to-be-reported quarter, which indicates a rise of 16.1% from the prior-year quarter’s reported figure. The consensus estimate for non-performing loans of $5.21 billion shows an 18.7% 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 +0.65%.

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

The Zacks Consensus Estimate for earnings is pegged at 77 cents, which has witnessed an upward revision of 2.7% over the past seven days. The estimated figure reflects growth of 108.1% from the year-ago reported number.

However, the consensus estimate for sales of $21.85 billion indicates a 2.1% decline.


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 First Republic Bank FRC is +1.47% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Jul 13.

PNC Financial PNC is slated to report quarterly results on Jul 14. The company has an Earnings ESP of +6.14% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. Bancorp USB is scheduled to announce quarterly results on Jul 15. The company has an Earnings ESP of +0.49% and currently carries a Zacks Rank of 3.

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