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Fee Income to Aid BofA's (BAC) Q4 Earnings Amid Low Rates

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Bank of America (BAC - Free Report) is expected to have recorded an impressive trading performance in the fourth quarter of 2020. Similar to the first nine months of 2020, the fourth quarter witnessed a significant rise in market volatility due to the lingering concerns related to the coronavirus pandemic. Specifically, in the fourth quarter, developments like the vaccine breakthroughs and the U.S. Presidential elections led to a rise in volatility. Thus, the company’s trading revenues are expected to be a major supporting factor in its upcoming results, slated to be announced on Jan 19, before market open.

Notably, in the fourth quarter, there was significant upswing in the equity markets, with almost all major indexes touching new highs. Along with impressive equity markets performance, fixed income trading remained strong, driven by the Federal Reserve’s bond-buying program. Hence, BofA’s equity as well as fixed-income trading revenues is expected to have improved.

The Zacks Consensus Estimate for equity trading revenues for the to-be-reported quarter is pegged at $1.12 billion, which suggests an increase of 10.3% from the prior-year quarter’s reported number. Likewise, the consensus estimate for fixed-income trading revenues of $1.95 billion indicates a rise of 11% year over year.

The consensus estimate for total trading revenues is pegged at $3.07 billion, suggesting a rise of 10.7% year over year.

Now, let’s check the other factors that are expected to have influenced BofA’s fourth-quarter performance.

Other Key Factors

Investment Banking (IB) Fees: Deal making continued at a fast pace in fourth-quarter 2020 as economic and business activities resumed globally. Hence, BofA’s advisory fees are likely to have been positively impacted.

Likewise, IPO activities continued to rise. Also, as companies kept building 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 began in March 2020), 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 fourth quarter.

BofA’s IB revenues are accounted in the Global Banking segment. At an investor conference in December 2020, the company’s CEO, Brian Moynihan said that IB fees in fourth-quarter will likely be 10-15% higher than a year ago.

However, the Zacks Consensus Estimate for the Global Banking segment’s net revenues of $4.44 billion indicates a decline of 13.7% from the prior-year level.

Net Interest Income (NII): Similar to the third quarter of 2020, the demand for loans remained muted during the fourth quarter, while commercial real estate loans and consumer loans offered some support. The primary reasons behind low demand were economic slowdown and the pandemic-related scare. This along with the low interest rate environment is likely to have hurt BofA’s net interest yield and NII in the quarter.

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 fourth quarter.

Management expects operating expenses (excluding non-recurring items) of $13.7 billion for fourth-quarter 2020.

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

In fact, management said that there is very little chance of additional reserve build, going forward.

The Zacks Consensus Estimate for non-performing assets is pegged at $5.03 billion for the to-be-reported quarter, which indicates a rise of 31.2% from the prior-year quarter’s reported figure. Likewise, the consensus estimate for non-performing loans of $5.17 billion suggests a 45.4% year-over-year 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 a 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 +2.79%.

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

Estimate Revision Trend & Expectations

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 56 cents, which has witnessed an upward revision of 7.7% over the past seven days. The estimated figure suggests a decline of 24.3% from the year-ago reported number.

The consensus estimate for sales of $20.40 billion indicates an 8.7% decline from the year-ago quarter’s reported number. 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.

Bank of America Corporation Price and EPS Surprise


Bank of America Corporation Price and EPS Surprise

Bank of America Corporation price-eps-surprise | Bank of America Corporation Quote

Other Stocks That Warrant a Look

Here are a few other finance 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 Commerce Bancshares, Inc. (CBSH - Free Report) is +0.99% and it carries a Zacks Rank #3, currently. The company is scheduled to report quarterly numbers on Jan 20.

BankUnited, Inc. (BKU - Free Report) is slated to release earnings figures on Jan 21. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +2.46%.

Capital One Financial Corporation (COF - Free Report) is slated to release earnings figures on Jan 26. The company currently carries a Zacks Rank #2 and has an Earnings ESP of +3.50%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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