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Fee Income to Support BofA (BAC) Q3 Earnings Amid Low Rates

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A persistent rise in market volatility on account of the coronavirus and concerns of its impact on the economy was seen during third-quarter 2020. With an increase in volatility and higher client activities, Bank of America’s (BAC - Free Report) trading business is likely to have gotten a significant boost. Trading revenues, thus, are expected to be a major supporting factor for its upcoming results, slated to release on Oct 14, before market open.

During the quarter, the coronavirus pandemic and economic slowdown weighed on investor sentiments, while support from government’s stimulus package and the Federal Reserve’s efforts to support the economy were on the positive side. Thus, BofA’s equity and fixed income trading revenues are expected to have improved.

At an investor conference in mid-September, CEO Brian Moynihan provided third-quarter outlook for trading revenues. The bank expects the same to be up 5-10% year over year, driven by rise in both equity and fixed income.

Thus, trading revenues are likely to have been solid in the to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.18 billion suggests an increase of 2.4% from the prior-year quarter. The consensus estimate of $2.28 billion for fixed income trading revenues indicates rise of 10.9%.

Thus, the consensus estimate of $3.46 billion for trading revenues indicates a rise of 7.9% year over year.

Other Key Factors

Investment Banking (IB) Fees: Deal making rebounded in the third quarter as economic and business activities gradually resumed. During the quarter, dealmakers revisited transactions that were on hold as coronavirus wreaked havoc across the world. Hence, BofA’s advisory fees are likely to have been positively impacted.

Similarly, IPO activities bounced back, with the third quarter being one of the busiest since 2000. Also, as companies continued to build liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances.

Further, amid near-zero interest rates and the Federal Reserve’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. So, growth in BofA’s equity underwriting and debt origination fees (accounting for almost 40% of total IB fees) is expected to have been robust in the third quarter.

Management expects IB revenues to rise 3-5% from the prior year in the third quarter.

BofA’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.6 billion suggests an 11.7% decline from the prior-year level.

Net Interest Income (NII): With economic slowdown and the pandemic-related scare, demand for loans was muted during the third quarter, while real estate loan portfolio offered some support. This, along with the near-zero interest rates, is likely to have hurt BofA’s net interest yield and NII for the quarter.

At the investor conference, Moynihan stated that there is very little appetite for new loans among corporate clients. Further, the company’s loan balance has dipped to the pre-pandemic level and it seems that the loan book is likely to shrink for the first time since 2015 in the third quarter. Also, an uptick in prepayments is expected to hurt NII growth. Thus, the company expects NII to be down $600-$700 million on a sequential basis.

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 third quarter.

Moreover, effective third-quarter 2020, BofA started accounting for merchant services separately and not through a joint venture. As a result, the bank expects the unit to add nearly $200 million on a quarterly basis to overall operating expenses.

Asset Quality: With BofA having already built sufficient loan loss reserves owing to the worsening macro-economic backdrop in the first half of the year, there is a less chance of recording substantial increase in provision for loan losses in the third quarter.

Management believes that any addition to its reserves is likely to be “very modest” during the quarter.

Also, the consensus estimate for non-performing assets is pegged at $4.87 billion for the to-be-reported quarter, which indicates a 31% increase from the prior-year quarter. Likewise, the consensus estimate for non-performing loans of $4.73 billion suggests a 36.1% 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.

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 +3.93%.

Zacks Rank: BofA currently carries a Zacks Rank 3.

Estimate Revision Trend & Expectations

For the third quarter, the Zacks Consensus Estimate for earnings has moved 20.5% north to 55 cents per share over the past seven days. The estimated figure suggests a 5.4% fall from the year-ago reported number.  

Also, the consensus estimate for sales of $20.6 billion indicates 9.6% decline from the year-ago quarter. The decline is likely to have been majorly due to lower NII, which is expected to have been offset to some extent by the decent performance of fee income components.

Other than the above-mentioned fee income components, the company expects solid wealth management revenues and modest growth in consumer fees in the third quarter, given “the spending coming up the card income.”

Other Banks That Warrant a Look

Here are a few other major 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:

U.S. Bancorp (USB - Free Report) is scheduled to release quarterly results on Oct 14. The company has an Earnings ESP of +7.70% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Truist Financial Corporation (TFC - Free Report) is slated to report quarterly earnings on Oct 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +6.99%.

The Earnings ESP for The Bank of New York Mellon Corporation (BK - Free Report) is +1.97% and it carries a Zacks Rank of 3, at present. The company is slated to report quarterly numbers on Oct 16.

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