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Trading, Investment Banking to Hurt BofA's (BAC) Q1 Earnings

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Unlike 2018, the first quarter witnessed lower volatility and fall in client activity. Hence, Bank of America’s (BAC - Free Report) trading revenues are expected to fall. As trading revenues are an important part of the bank’s top line, this will likely have an adverse impact on its results slated on Apr 15.

During the first quarter, some concerns, including a few lingering ones from the prior quarters like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown continued.  These resulted in lower volatility, which led to decline in client activities.

Therefore, BofA’s trading revenues in the to-be-reported are expected to be muted.

Here are some other factors that are expected to influence BofA’s first-quarter results:

Muted investment banking performance: Prolong government shutdown at the beginning of the quarter, relatively higher rates and fears of economic slowdown hurt investment banking revenues. Hence, BofA’s equity and debt underwriting fees (accounting for almost 40% of total investment banking fees) are expected to be adversely impacted.

While dealmakers across the globe were active during the first quarter, global deal value and volume witnessed a decline owing to increase in borrowing costs and several geopolitical concerns. This also affected IPO activity during the quarter. So, this will hurt the bank’s advisory fees. However, with BofA being one of the leading players in this space, this will likely provide the company some leverage.

Lower scope of cost control: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be a big support for BofA in the to-be reported quarter. Further, as the company continues to digitize banking operations, upgrade technology and expands 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 first quarter.

Additionally, the company projects expenses to include nearly $500 million related to seasonally elevated personnel costs.

Decent net interest income growth: A decent lending scenario — mainly in the areas of commercial and industrial and consumer — during the first quarter will likely lead to an increase in net interest income (NII). Also, the December 2018 rate hike will have a slight positive impact on the company’s net interest margin despite flattening of the yield curve and steadily increasing deposit betas.

Further, the consensus estimate for average interest earning assets of $2 trillion for the first quarter reflects a rise of nearly 1% on a year-over-year basis. This, along with decent lending activities, is expected to further lead to a rise in BofA’s NII.

Notably, management expects NII to be negatively impacted by roughly $200 million for two less days, on a sequential basis. Net interest yield is likely to edge up slightly, driven by loan growth funded by low-cost deposits.

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 -1.22%.

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.

Notably, the Zacks Consensus Estimate for earnings of 65 cents reflects 4.8% growth on a year-over-year basis. Also, the consensus estimate for sales of $23.2 billion shows 0.5% increase.

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 M&T Bank Corp. (MTB - Free Report) is +0.05% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Apr 15.

Comerica Inc. (CMA - Free Report) is scheduled to release results on Apr 16. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.52%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BankUnited, Inc. (BKU - Free Report) is scheduled to release results on Apr 24. It has an Earnings ESP of +1.89% and a Zacks Rank #3.

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