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Will BofA (BAC) Disappoint This Season?

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Bank of America Corp. (BAC - Free Report) is slated to release first-quarter results tomorrow, Apr 16, before the opening bell.

In the fourth quarter, BofA delivered an earnings surprise of 11.54% aided by substantial reduction in the provision for credit losses, top-line growth and lower non-interest expenses. The banking bellwether returned to profitability in 2010 and has been performing decently since then.

Will BofA manage to maintain its earnings streak this quarter or should we expect a digression? Let us see how things have shaped up for this announcement.

Factors to Affect Q1 Results

The overall market condition was sluggish during the first quarter of 2014. Moreover, following impressive recovery in the last few quarters, the equity market seems to have somewhat slowed down as reflected in softer trading volumes this quarter.

Therefore, in the present low interest rate scenario, we do not expect BofA to report a remarkable improvement in interest income. Moreover, the company is likely to report a subdued fee income also primarily due to sluggish mortgage as well as brokerage activities.

Nevertheless, the company’s efforts to realign and improve its balance sheet are commendable. Moreover, BofA’s 2014 capital plan was approved by the Federal Reserve following the Comprehensive Capital Analysis and Review (CCAR), thereby reflecting the company’s strong capital position.

Further, BofA’s cost containment measures seem impressive as well. The company adopted various cost containment measures which included layoffs and closure of unprofitable/non-core units during the quarter. However, the effect of the same will be felt only sometime later.

Further, in March, the company announced a $9.3 billion mortgage settlement deal with the Federal Housing Finance Agency (FHFA). The deal increased BofA’s legal woes and is expected to lower the company’s first-quarter earning per share by 21 cents.

Moreover, fresh probes related to faulty mortgage lending practices in the pre-crisis period may have prompted BofA to increase its reserves during the quarter. Therefore, legal expenses as well as increasing reserves to meet the same will likely pressure BofA’s earnings this quarter.

However, we should not forget that despite large reserves kept aside to meet its legal expenses, BofA managed to deliver positive surprises in three out of the trailing four quarters with an average beat of 20.5%. Moreover, the company’s efficiency initiative – Project New BAC – remains in place and will partially aid in neutralize rising legal expenses.

BofA’s activities during the quarter failed to gain analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained flat at 5 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show BofA as likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP:  The Earnings ESP for BofA is 0.00%.  This is because the Most Accurate estimate as well as the Zacks Consensus Estimate stands at 5 cents.

Zacks Rank: BofA’s Zacks Rank #4 (Sell) decreases the predictive power of ESP. This is because a Zacks Rank #4, together with a 0.00% ESP lowers the chances of a positive surprise.

Stocks to Consider

Here are a few banking 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 quarter.

BankUnited, Inc. (BKU - Free Report) has an earnings ESP of +6.82% and a Zacks Rank #2. It is scheduled to report first-quarter results on Apr 24.

The PNC Financial Services Group, Inc. (PNC - Free Report) has an earnings ESP of +2.41% and a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 16.

First Horizon National Corp. (FHN - Free Report) has an earnings ESP of +6.67% and a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 17.

Read the Full Research Report on BAC
Read the Full Research Report on PNC
Read the Full Research Report on FHN
Read the Full Research Report on BKU

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