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Loans, Trading to Support BofA (BAC) Q1 Earnings, IB to Hurt

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After witnessing the gradual normalization of trading activities over the past few quarters, trading revenues are expected to have surprisingly rebounded for Bank of America (BAC - Free Report) in the first quarter of 2022. Thus, trading revenues might offer some support to its results, scheduled to be announced on Apr 18, before the opening bell.

The first quarter began with the expectations of trading volumes declining to levels seen during the pre-pandemic era after an exceptional performance during the past two years. Yet, the ongoing Russia-Ukraine conflict and prospects of multiple and bigger rate hikes by the Federal Reserve to control the raging inflation led to an increase in client activity and trading volume in the quarter.

These developments have led to a heightened level of volatility in both equity markets and bond trading. So, BAC is likely to have recorded a solid improvement in trading revenues this time.

The Zacks Consensus Estimate for equity trading revenues of $1.63 billion suggests an increase of 20.2% from the prior quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.53 billion indicates a jump of 60.5%. The consensus estimate for total trading revenues is pegged at $4.15 billion, implying a surge of 41.5%.

Other Major Factors

Loan Demand & Net Interest Income (NII): Lending activities continued to improve in the first quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans accelerated. Also, BofA’s net interest yield and NII are likely to have been positively impacted by the interest rate hike of 25 basis points by the Fed in mid-March.

The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.78 trillion, suggesting a 1.1% increase from the prior quarter’s reported figure.

Yet, the first quarter is usually slow for loan originations, which along with the flattening of the yield curve (the difference between short and long-term interest rates), is likely to have hindered BofA’s net interest yield. Further, fewer days in the quarter are likely to have hurt NII.

The Zacks Consensus Estimate for NII on FTE basis of $11.7 billion suggests a 1.8% rise on a sequential basis.

Management expects two headwinds – two less interest accrual days and less PPP fee benefit – to hurt NII by $250 million during the first quarter. Nonetheless, NII will be “up about a couple of hundred million” sequentially.

Investment Banking (IB) Fees: After an astonishing performance for almost two years, deal-making came to a grinding halt in March. The ongoing Russia-Ukraine conflict (leading to choppiness in the equity markets worldwide) and ambiguity over the economic slowdown tied to inflation weighed on business sentiments. Thus, both deal volume and total value witnessed a decline during the first quarter. Hence, BofA’s advisory fees are likely to have been adversely impacted.

Given the above-mentioned concerns, equity market performance was disappointing and thus, the IPOs and follow-up equity issuances dried up. On the other hand, bond issuances are likely to have been decent. BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the March quarter.

The Zacks Consensus Estimate for IB income of $1.83 billion indicates a decrease of 22% from the prior quarter level.

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.

BAC expects elevated personnel costs of roughly $400 million and increased costs related to seasonally higher sales and trading revenues.

Asset Quality: Throughout 2021, BofA continued to release reserves that it had taken to cover losses from the effects of the coronavirus pandemic. This hugely supported the company’s earnings. Now with the majority of releases done last year, reserve releases are not expected to be of much support to the company’s earnings in the to-be-reported quarter.

The Zacks Consensus Estimate for non-performing loans of $4.57 billion implies a marginal increase sequentially.

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 -0.39%.

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

The Zacks Consensus Estimate for first-quarter earnings is pegged at 77 cents, which has witnessed a downward revision of 1.3% over the past 30 days. Further, the estimated figure suggests a fall of 10.5% from the year-ago reported number.

The consensus estimate for sales of $23.22 billion indicates a 1.7% rise.

Banks That Warrant a Look

Here are a couple of 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:

State Street (STT - Free Report) is scheduled to release first-quarter 2022 earnings on Apr 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.80%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

STT’s quarterly earnings estimates have moved 2.8% upward over the past month.

Commerce Bancshares (CBSH - Free Report) is slated to announce first-quarter 2022 results on Apr 19. The company currently carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +2.33%.

CBSH’s earnings estimates for the to-be-reported quarter have moved 3.5% north over the 30 days.

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

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Commerce Bancshares, Inc. (CBSH) - free report >>