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Dismal Trading, Lower Rates to Hurt BofA's (BAC) Q3 Earnings

Zacks Equity Research

Bank of America’s BAC third-quarter trading revenues are likely to have taken a hit owing to lower client activity, similar to the first half of 2019. As trading revenues are an important part of the bank’s top line, this will reflect adversely on its earnings slated to be released on Oct 16.

During the third quarter, several concerns, including uncertainty related to the U.S.-China trade war and Brexit, and expectations of global economic slowdown persisted. The Federal Reserve’s accommodative monetary policy stance and many geopolitical matters led to ambiguity too. All these factors weighed on investors’ mind, resulting in lower client activity.

Though decent equity markets performance seems to have resulted in a marginal rise in equity trading, the above-mentioned concerns are expected to have weighed on fixed income trading. So, overall growth in trading revenues is likely to have been muted in the to-be-reported quarter.

At an investors' conference in early September, the Chief Operating Officer Tom Montag had stated that fixed income trading revenues were down “a little bit” while equity trading business had performed well. He had further added that September remains the most important month.

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 $3.81 billion indicate a decline of nearly 1% from the year-ago reported number.

Here are few other important factors that are expected to have influenced BofA’s third-quarter results:

Net interest income not of much support: A dismal lending picture — mainly in the areas of commercial and industrial, and commercial real estate — during the third quarter is expected to have had an adverse impact on BofA’s net interest income (NII). However, decent consumer loan growth might have offered some support.

Decline in interest rates (two rate cuts – in July and September) and flattening of the yield curve are likely to have hurt the company’s net interest yield as well.

Though the consensus estimate for average interest earning assets of $2.03 trillion for the third quarter indicates a rise of 3.1% from the year-ago reported figure, muted loan growth and lower interest rates would have hampered BofA’s NII growth.

Per management, NII should have benefited from growth in loan and deposits, and an additional day of interest in the third quarter, while lower rates posed a headwind.

Dismal investment banking performance: While dealmakers across the globe were active during the third quarter, M&A deal value and volume witnessed a decline due to several geopolitical concerns as the companies became more risk-averse. So, this is likely to have hurt the bank’s advisory fees. However, with BofA being one of the leading players in this space and its increased focus on M&A business, this must have provided some leverage.

Further, despite decent equity markets performance and the central bank’s accommodative stance, corporates seem to be shying away from equity issuances, given the global concerns. The same factors seem have had an unfavorable impact on IPO activity during the to-be-reported quarter. However, overall debt issuances were decent, given the lower interest rates.

Hence, growth in BofA’s equity underwriting fees and debt origination fees (accounting for almost 40% of total investment banking fees) is expected to have remained soft.

At the investors' conference, management had projected investment banking revenues to be up in the low-single digits range on a year-over-year basis.

BofA’s investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.89 billion suggests a 3.3% rise.

Lower scope of cost control: Expense reduction, which has long been the main strategy to remain profitable, is not likely to have been a big support for BofA in the to-be reported quarter. As the bank continues to digitize banking operations, upgrade technology and expand into newer markets by opening branches, related costs have probably risen.

Nonetheless, 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 might have remained manageable in the third quarter.

Recognition of Pre-Tax Impairment Charge: BofA might have recognized a pre-tax impairment charge of $2.1 billion (to be included in other general operating expenses) in third quarter related to the termination of its merchant servicing joint venture – Banc of America Merchant Services – with First Data. The charges are likely to have lowered the company’s common equity tier 1 ratio by 10 basis points.

Here is what our quantitative model predicts:

We cannot conclusively predict an earnings beat for BofA as it doesn’t have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

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 0.00%.

Zacks Rank: BofA carries a Zacks Rank #3.

Bank of America Corporation Price and EPS Surprise

Notably, given the concerns related to adverse impact of lower rates and dismal capital markets performance, analysts are bearish on the stock. The Zacks Consensus Estimate for earnings of 50 cents has moved 7.4% lower over the past seven days. The figure suggests 24.2% decline from the year-ago reported number.

Also, the consensus estimate for sales of $22.2 billion indicates 2.6% decrease.

Stocks to Consider

Here are a few finance 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 +0.07% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Oct 15.

Citigroup C is scheduled to release results on Oct 15. The company has an Earnings ESP of +0.55% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BNY Mellon BK is +0.11% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 16.

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