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Trading, Higher Rates to Aid BofA (BAC) Q3 Earnings, IB to Hurt
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The trading business is likely to have been a bright spot for Bank of America (BAC - Free Report) in the third quarter. Hence, trading revenues, the source of a large portion of the company’s top line, might have offered some support to its earnings slated on Oct 17, before the opening bell.
After witnessing the gradual normalization of trading activities over the second half of last year, the same has rebounded since the beginning of 2022 on uncertainty-induced market volatility. Russia’s invasion of Ukraine and continued supply chain disruptions have led to ambiguity among investors. Also, fears of a severe economic slowdown amid the ultra-aggressive monetary policy stance of the central banks across the globe to control high inflation resulted in heightened client activities and increased trading volume during the third quarter.
These factors led to higher volatility in equity markets (with all three major indexes slipping into the bear markets) and other asset classes, including bonds, commodities and foreign exchange. Hence, BofA is likely to have witnessed some growth in trading revenues this time.
The Zacks Consensus Estimate for trading revenues of $3.57 billion suggests a fall of 1.3% from the prior-year quarter’s reported number. Our estimate for the metric is the same as the consensus number.
Other Key Factors to Impact Q3 Results
Loan Demand & Net Interest Income (NII): The lending scenario continued to improve in the third quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans remained solid. These are likely to have driven decent loan growth for BAC.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.75 trillion, suggesting a 3.7% increase on a year-over-year basis. Our estimate for the metric is $3 trillion, indicating an almost 13% rise.
Also, during the quarter, the Federal Reserve raised interest rates by 150 basis points. The policy rate now stands at the 3.0-3.25% range, the highest since 2008. This is likely to have had a favorable impact on BAC’s net interest yield and NII. Yet, the flattening/inversion of the yield curve in the third quarter is expected to have weighed on margins to some extent.
Provided loans grow at a moderate pace and deposit betas reflect disciplined pricing to achieve growth, management anticipates NII in the third quarter to rise in the range of $900 million-$1 billion sequentially.
The Zacks Consensus Estimate for NII on FTE basis of $13.55 billion suggests a 21% jump. Our estimate for NII on FTE basis implies a rise of 22.5% to $13.71 billion.
Investment Banking (IB) Fees: After a stellar performance for almost two years, global deal-making hit a record low for the third consecutive quarter. Raging inflation, equity markets rout and fears of recession dealt a blow to the business sentiments and plans for expansion through acquisitions. Thus, both deal volume and total value crashed during the quarter. So, BofA’s advisory fees are likely to have been adversely impacted.
Given the above-mentioned reasons, equity market performance was disappointing and thus, both the IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the to-be-reported quarter.
The Zacks Consensus Estimate for IB income of $1.22 billion indicates a plunge of 43.6% from the prior-year quarter 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 to-be-reported quarter.
Further, last week, BAC agreed to pay $1.84 billion to resolve claims by Ambac Financial, a bond insurer, regarding residential mortgage-backed securities. The settlement is expected to result in third-quarter pre-tax expenses of $354 million or 3 cents per share for the company.
Our estimate for non-interest expenses stands at $15.92 billion, reflecting an increase of 10.2% on a year-over-year basis.
Asset Quality: With an increase in loan balance and expectations of a worsening macroeconomic outlook, BAC is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $392 million against a provision benefit of $624 million a year ago.
The Zacks Consensus Estimate for non-performing loans of $4.54 billion implies a 3.7% decrease year over year. Our estimate for the metric is pegged at $4.74 billion, marking a marginal rise.
What the Zacks Model Unveils
Our proven model does not predict an earnings beat for BofA this time around. This is because it doesn’t have 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.
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 -0.75%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
The Zacks Consensus Estimate for third-quarter earnings is pegged at 80 cents, which has remained unchanged over the past seven days. Further, the estimated figure suggests a fall of 5.9% from the year-ago reported number. Our estimate for earnings is 81 cents, indicating a 4.2% decline.
The consensus estimate for sales of $23.63 billion indicates 3.8% growth. Our estimate for sales is $24.17 billion, reflecting a rise of 6.2%.
Banks to Consider
Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for Morgan Stanley (MS - Free Report) is +0.59% and it carries a Zacks Rank #3, at present. The company is slated to report third-quarter 2022 results on Oct 14.
Over the past 30 days, MS’ Zacks Consensus Estimate for quarterly earnings has moved 2.6% lower.
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Trading, Higher Rates to Aid BofA (BAC) Q3 Earnings, IB to Hurt
The trading business is likely to have been a bright spot for Bank of America (BAC - Free Report) in the third quarter. Hence, trading revenues, the source of a large portion of the company’s top line, might have offered some support to its earnings slated on Oct 17, before the opening bell.
After witnessing the gradual normalization of trading activities over the second half of last year, the same has rebounded since the beginning of 2022 on uncertainty-induced market volatility. Russia’s invasion of Ukraine and continued supply chain disruptions have led to ambiguity among investors. Also, fears of a severe economic slowdown amid the ultra-aggressive monetary policy stance of the central banks across the globe to control high inflation resulted in heightened client activities and increased trading volume during the third quarter.
These factors led to higher volatility in equity markets (with all three major indexes slipping into the bear markets) and other asset classes, including bonds, commodities and foreign exchange. Hence, BofA is likely to have witnessed some growth in trading revenues this time.
The Zacks Consensus Estimate for trading revenues of $3.57 billion suggests a fall of 1.3% from the prior-year quarter’s reported number. Our estimate for the metric is the same as the consensus number.
Other Key Factors to Impact Q3 Results
Loan Demand & Net Interest Income (NII): The lending scenario continued to improve in the third quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans remained solid. These are likely to have driven decent loan growth for BAC.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.75 trillion, suggesting a 3.7% increase on a year-over-year basis. Our estimate for the metric is $3 trillion, indicating an almost 13% rise.
Also, during the quarter, the Federal Reserve raised interest rates by 150 basis points. The policy rate now stands at the 3.0-3.25% range, the highest since 2008. This is likely to have had a favorable impact on BAC’s net interest yield and NII. Yet, the flattening/inversion of the yield curve in the third quarter is expected to have weighed on margins to some extent.
Provided loans grow at a moderate pace and deposit betas reflect disciplined pricing to achieve growth, management anticipates NII in the third quarter to rise in the range of $900 million-$1 billion sequentially.
The Zacks Consensus Estimate for NII on FTE basis of $13.55 billion suggests a 21% jump. Our estimate for NII on FTE basis implies a rise of 22.5% to $13.71 billion.
Investment Banking (IB) Fees: After a stellar performance for almost two years, global deal-making hit a record low for the third consecutive quarter. Raging inflation, equity markets rout and fears of recession dealt a blow to the business sentiments and plans for expansion through acquisitions. Thus, both deal volume and total value crashed during the quarter. So, BofA’s advisory fees are likely to have been adversely impacted.
Given the above-mentioned reasons, equity market performance was disappointing and thus, both the IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the to-be-reported quarter.
The Zacks Consensus Estimate for IB income of $1.22 billion indicates a plunge of 43.6% from the prior-year quarter 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 to-be-reported quarter.
Further, last week, BAC agreed to pay $1.84 billion to resolve claims by Ambac Financial, a bond insurer, regarding residential mortgage-backed securities. The settlement is expected to result in third-quarter pre-tax expenses of $354 million or 3 cents per share for the company.
Our estimate for non-interest expenses stands at $15.92 billion, reflecting an increase of 10.2% on a year-over-year basis.
Asset Quality: With an increase in loan balance and expectations of a worsening macroeconomic outlook, BAC is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $392 million against a provision benefit of $624 million a year ago.
The Zacks Consensus Estimate for non-performing loans of $4.54 billion implies a 3.7% decrease year over year. Our estimate for the metric is pegged at $4.74 billion, marking a marginal rise.
What the Zacks Model Unveils
Our proven model does not predict an earnings beat for BofA this time around. This is because it doesn’t have 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.
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 -0.75%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
Bank of America Corporation price-eps-surprise | Bank of America Corporation Quote
The Zacks Consensus Estimate for third-quarter earnings is pegged at 80 cents, which has remained unchanged over the past seven days. Further, the estimated figure suggests a fall of 5.9% from the year-ago reported number. Our estimate for earnings is 81 cents, indicating a 4.2% decline.
The consensus estimate for sales of $23.63 billion indicates 3.8% growth. Our estimate for sales is $24.17 billion, reflecting a rise of 6.2%.
Banks to Consider
Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for Morgan Stanley (MS - Free Report) is +0.59% and it carries a Zacks Rank #3, at present. The company is slated to report third-quarter 2022 results on Oct 14.
Over the past 30 days, MS’ Zacks Consensus Estimate for quarterly earnings has moved 2.6% lower.
Associated Banc-Corp (ASB - Free Report) is scheduled to release third-quarter 2022 earnings on Oct 20. The company, which sports a Zacks Rank #1 (Strong Buy) at present, has an Earnings ESP of +2.39%. You can see the complete list of today’s Zacks #1 Rank stocks here.
ASB’s quarterly earnings estimates have moved 1.7% upward over the past month.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.