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IB, Loans, Equity Trading to Support BofA's (BAC) Q4 Earnings

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After witnessing robust client activities and market volatility over the past few quarters, market normalization and lower-level volatility (compared with the prior-year period) in the fourth quarter of 2021 are expected to have dampened Bank of America’s (BAC - Free Report) trading business to some extent. Thus, trading revenues are not expected to provide much support to the company’s upcoming earnings release, slated to be announced on Jan 19, before market open.

Like the past quarters, major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the fourth quarter, with all three touching new highs. Also, concerns over accelerating coronavirus infections across the globe, steady rise in inflation, fading fiscal stimulus and the Federal Reserve’s hawkish monetary stance weighed on investor sentiments.

These factors resulted in a heightened level of equity market volatility during the fourth quarter. On the other hand, bond trading remained decent in the October-December quarter.

The Zacks Consensus Estimate for equity trading revenues of $1.41 billion suggests an increase of 6.9% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.73 billion indicates a rise of 2.4%. The consensus estimate for total trading revenues is pegged at $3.14 billion, implying growth of 4.4%.

Other Key Factors at Play

Investment Banking (IB) Fees: Like the past several quarters, deal-making continued at a robust pace in fourth-quarter 2021, with both deal volume and value witnessing significant growth. This was primarily driven by the resumption of normal business activities, excess liquidity levels, companies’ appetite for strengthening scale and market share and solid economic recovery. Hence, BofA’s advisory fees are likely to have been positively impacted.

Continued momentum in the IPO market and a steady rise in follow-up equity issuances might have offered support to equity underwriting fees in the to-be-reported quarter. Bond issuance volumes were modest. Thus, growth in BofA’s equity underwriting and debt origination fees (accounting for almost 40% of total IB fees) is expected to have been decent.

The Zacks Consensus Estimate for IB fees of $2.04 billion indicates an increase of 9.4% from the prior-year level.

Net Interest Income (NII): Lending activities continued to improve in the fourth quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans accelerated in October and November. Yet, high levels of pay downs and payoffs and stiff loan pricing competition are likely to have hurt BofA’s loan volumes. This, along with a persistently low-interest-rate environment, is expected to have had some adverse impact on its NII and net interest yield in the quarter.

The Zacks Consensus Estimate for NII on FTE basis of $11.4 billion suggests 9.6% growth from the prior-year reported number.

Management continues to expect quarterly NII to be roughly $11.3 billion. This is based on the assumptions of the forward interest rate curve materializing, economic recovery, investing more excess liquidity into securities, slightly lower expenses from premium amortization and modest loan growth, partially offset by lower interest income from PPP loans.

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.

Management expects fourth-quarter operating expenses to be flat or modestly decline on a sequential basis and be around $14 billion. For 2021, it is projected to be nearly $56.5 billion.

Asset Quality: Continuing with the trend of the last few quarters and driven by improving macroeconomic backdrop and stable credit market conditions, BofA is likely to have released reserves that it had taken to cover losses from the effects of the coronavirus pandemic.

As the economic outlook and remaining uncertainties continue to improve, management expects reserve levels to keep moving lower. With respect to card losses, given the continued low level of late-stage delinquencies in the 180-day pipeline, card losses are expected to decline in the fourth quarter of 2021.

The Zacks Consensus Estimate for non-performing loans of $4.73 billion implies a 4.5% fall.

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 -0.66%.

Zacks Rank: It currently carries a Zacks Rank #3.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 76 cents, which has witnessed a downward revision of 1.3% over the past seven days. Nonetheless, the estimated figure suggests growth of 28.8% from the year-ago reported number.

Also, the consensus estimate for revenues of $22.08 billion indicates a 9.9% rise.

Banks That Warrant a Look

Here are few 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 PNC Financial Services Group, Inc. (PNC - Free Report) is scheduled to release fourth-quarter and full-year 2021 earnings on Jan 18. PNC, which carries a Zacks Rank #3 at present, has an Earnings ESP of +2.29%.

PNC Financial’s quarterly earnings estimates have decreased marginally over the past month.

Commerce Bancshares (CBSH - Free Report) is slated to announce fourth-quarter and full-year 2021 results on Jan 19. CBSH currently carries a Zacks Rank #3 and has an Earnings ESP of +1.24%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CBSH’s earnings estimates for the to-be-reported quarter have moved 3.3% north over the 30 days.

BankUnited (BKU - Free Report) is scheduled to release earnings on Jan 21. BKU, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +42.98%.

The Zacks Consensus Estimate for BankUnited’s fourth-quarter earnings has been unchanged over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.