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High Rates, Loans, IB, Trading to Aid BofA (BAC) Q4 Earnings
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Bank of America (BAC - Free Report) is slated to report fourth-quarter and full-year 2023 results on Jan 12, before the opening bell. Despite being the most interest rate-sensitive among its peers, the company’s net interest income (NII) is less likely to have improved in the fourth quarter.
Though the Federal Reserve did not raise rates in the quarter, the policy rate stands at a 22-year high of 5.25-5.5% at present. This is likely to have aided BAC’s NII and net interest margin (NIM). But the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, is expected to have weighed on both NII and NIM.
The situation is likely to have been further aggravated by the inverted yield curve in the December-ended quarter. Also, per the Fed’s latest data, the overall lending scenario was weak. The demand for commercial and industrial, real estate and consumer loans (except credit card loans) loans was subdued in October and November.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.72 trillion, suggesting a 2.7% rise from the year-ago reported number. Our estimate for the metric is $2.63 trillion.
Management expects NII (FTE) to be around $14 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14.04 billion suggests a 5.2% decrease. Our estimate for NII (FTE) implies a fall of 5.3% to $14.02 billion.
For 2023, management expects NII (FTE) to witness growth of 9%. Our estimate for the metric is $57.43 billion, implying an increase of 8.6%.
Other Factors at Play
Trading Income: Market volatility and client activity were subdued in the fourth quarter. While the risks of a recession in the near term faded, ambiguity related to geopolitical issues, inflation and high rates kept investors on the sidelines. These factors led to reduced volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is less likely to have recorded a solid performance in trading revenues this time.
The Zacks Consensus Estimate for total sales and trading revenues of $3.76 billion suggests 6.5% growth from the year-ago reported number. Our estimate for the metric is $3.75 billion.
Management projects quarterly trading revenues to be up in the low single-digit range year over year.
Investment Banking (IB) Fees: While green shoots were visible in the IB space in the fourth quarter, overall global M&A activities remained muted on a year-over-year basis. Several concerns, including lingering geopolitical tensions, inflation concerns, higher interest rates and China’s economic slowdown, weighed on deal-making. Thus, the deal volume and total value numbers were weak in the fourth quarter.
Likewise, the IPO market was subdued after witnessing considerable activity in the third quarter. On the other hand, robust equity market performance drove some activity in follow-up equity issuances. Also, despite seasonality, bond issuance volume was boosted by a decline in yields in the back half of the quarter and a slightly better operating backdrop compared with last year. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have improved during the to-be-reported quarter.
At Goldman Sachs’ U.S. Financial Services Conference in early December 2023, Bank of America CEO Brian Moynihan noted, “The M&A deals are coming a little faster.” The company will outperform the industry on IB fees in the quarter. The bank expects to earn approximately $1 billion in IB fees in the fourth quarter, reflecting a low single-digit decline on a year-over-year basis. Moynihan added that the industry-wide IB fee pool is expected to decline 10-15%.
The Zacks Consensus Estimate for IB income of $1.12 billion indicates a rise of 5.9% from the prior-year quarter level. We expect IB income to be $1.17 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers, as well as efforts to digitize operations and upgrade existing financial centers, are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
The company expects expenses to be roughly $15.6 billion. Our estimate for non-interest expenses stands at $15.83 billion, implying an increase of 1.8%.
Asset Quality: Bank of America is expected to have set aside a substantial amount of money for potential bad loans (mainly commercial loan defaults), given an uncertain macroeconomic outlook. Our estimate for provision for credit losses is pegged at $1.52 billion, reflecting a surge of 38.9% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $5.19 billion implies a 36.2% jump year over year. Our estimate for the metric is pegged at $4.11 billion.
Charges Tied to Libor Transition: In a filing with the Securities and Exchange Commission on Jan 8, 2024, Bank of America stated it will incur a net non-cash pre-tax charge of $1.6 billion in the fourth quarter as it phases out the use of the Bloomberg Short-Term Bank Yield Index (BSBY).
The charge will be presented in “revenue through market making and similar activities.” The company expects the $1.6 billion net impact to be recognized back in its interest income through 2026. This charge will lower BofA’s common equity tier 1 ratio by eight basis points as of Dec 31, 2023.
What the Zacks Model Shows
Our proven model does not conclusively predict an earnings beat for BofA this time. This is because it doesn’t have the right combination of the two key ingredients — 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 -0.22%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 70 cents, which has moved 1.4% lower over the past 30 days. The number suggests a decline of 17.7% from the year-ago reported number. Our estimate for earnings is 67 cents.
The consensus estimate for sales of $23.97 billion indicates a 2.3% fall. Our estimate for sales is $23.91 billion, reflecting a decrease of 2.5%.
Major Banks to Consider
Here are a couple of 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:
The Earnings ESP for U.S. Bancorp (USB - Free Report) is +1.75% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.
Over the past seven days, the Zacks Consensus Estimate for USB’s quarterly earnings has remained unchanged at 99 cents.
Image: Bigstock
High Rates, Loans, IB, Trading to Aid BofA (BAC) Q4 Earnings
Bank of America (BAC - Free Report) is slated to report fourth-quarter and full-year 2023 results on Jan 12, before the opening bell. Despite being the most interest rate-sensitive among its peers, the company’s net interest income (NII) is less likely to have improved in the fourth quarter.
Though the Federal Reserve did not raise rates in the quarter, the policy rate stands at a 22-year high of 5.25-5.5% at present. This is likely to have aided BAC’s NII and net interest margin (NIM). But the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, is expected to have weighed on both NII and NIM.
The situation is likely to have been further aggravated by the inverted yield curve in the December-ended quarter. Also, per the Fed’s latest data, the overall lending scenario was weak. The demand for commercial and industrial, real estate and consumer loans (except credit card loans) loans was subdued in October and November.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.72 trillion, suggesting a 2.7% rise from the year-ago reported number. Our estimate for the metric is $2.63 trillion.
Management expects NII (FTE) to be around $14 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14.04 billion suggests a 5.2% decrease. Our estimate for NII (FTE) implies a fall of 5.3% to $14.02 billion.
For 2023, management expects NII (FTE) to witness growth of 9%. Our estimate for the metric is $57.43 billion, implying an increase of 8.6%.
Other Factors at Play
Trading Income: Market volatility and client activity were subdued in the fourth quarter. While the risks of a recession in the near term faded, ambiguity related to geopolitical issues, inflation and high rates kept investors on the sidelines. These factors led to reduced volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is less likely to have recorded a solid performance in trading revenues this time.
The Zacks Consensus Estimate for total sales and trading revenues of $3.76 billion suggests 6.5% growth from the year-ago reported number. Our estimate for the metric is $3.75 billion.
Management projects quarterly trading revenues to be up in the low single-digit range year over year.
Investment Banking (IB) Fees: While green shoots were visible in the IB space in the fourth quarter, overall global M&A activities remained muted on a year-over-year basis. Several concerns, including lingering geopolitical tensions, inflation concerns, higher interest rates and China’s economic slowdown, weighed on deal-making. Thus, the deal volume and total value numbers were weak in the fourth quarter.
Likewise, the IPO market was subdued after witnessing considerable activity in the third quarter. On the other hand, robust equity market performance drove some activity in follow-up equity issuances. Also, despite seasonality, bond issuance volume was boosted by a decline in yields in the back half of the quarter and a slightly better operating backdrop compared with last year. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have improved during the to-be-reported quarter.
At Goldman Sachs’ U.S. Financial Services Conference in early December 2023, Bank of America CEO Brian Moynihan noted, “The M&A deals are coming a little faster.” The company will outperform the industry on IB fees in the quarter. The bank expects to earn approximately $1 billion in IB fees in the fourth quarter, reflecting a low single-digit decline on a year-over-year basis. Moynihan added that the industry-wide IB fee pool is expected to decline 10-15%.
The Zacks Consensus Estimate for IB income of $1.12 billion indicates a rise of 5.9% from the prior-year quarter level. We expect IB income to be $1.17 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers, as well as efforts to digitize operations and upgrade existing financial centers, are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
The company expects expenses to be roughly $15.6 billion. Our estimate for non-interest expenses stands at $15.83 billion, implying an increase of 1.8%.
Asset Quality: Bank of America is expected to have set aside a substantial amount of money for potential bad loans (mainly commercial loan defaults), given an uncertain macroeconomic outlook. Our estimate for provision for credit losses is pegged at $1.52 billion, reflecting a surge of 38.9% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $5.19 billion implies a 36.2% jump year over year. Our estimate for the metric is pegged at $4.11 billion.
Charges Tied to Libor Transition: In a filing with the Securities and Exchange Commission on Jan 8, 2024, Bank of America stated it will incur a net non-cash pre-tax charge of $1.6 billion in the fourth quarter as it phases out the use of the Bloomberg Short-Term Bank Yield Index (BSBY).
The charge will be presented in “revenue through market making and similar activities.” The company expects the $1.6 billion net impact to be recognized back in its interest income through 2026. This charge will lower BofA’s common equity tier 1 ratio by eight basis points as of Dec 31, 2023.
What the Zacks Model Shows
Our proven model does not conclusively predict an earnings beat for BofA this time. This is because it doesn’t have the right combination of the two key ingredients — 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 -0.22%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
Bank of America Corporation price-eps-surprise | Bank of America Corporation Quote
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 70 cents, which has moved 1.4% lower over the past 30 days. The number suggests a decline of 17.7% from the year-ago reported number. Our estimate for earnings is 67 cents.
The consensus estimate for sales of $23.97 billion indicates a 2.3% fall. Our estimate for sales is $23.91 billion, reflecting a decrease of 2.5%.
Major Banks to Consider
Here are a couple of 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:
The Earnings ESP for U.S. Bancorp (USB - Free Report) is +1.75% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.
Over the past seven days, the Zacks Consensus Estimate for USB’s quarterly earnings has remained unchanged at 99 cents.
M&T Bank (MTB - Free Report) is scheduled to release fourth-quarter and full-year 2023 earnings on Jan 18. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.01%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MTB’s quarterly earnings estimates have moved almost 1% lower over the past week to $3.70.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar