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High Rates, Loans, IB to Support BofA's (BAC) Q1 Earnings
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Bank of America (BAC - Free Report) is scheduled to report first-quarter 2024 results on Apr 16, before the opening bell. Despite being the most interest rate-sensitive among its peers, the increase in the company’s net interest income (NII) is likely to have been subdued in the quarter.
The Federal Reserve kept the interest rates unchanged in the quarter at a 22-year high of 5.25-5.5%. 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 metrics. The inverted yield curve in the March-ended quarter is likely to have further aggravated the matter.
Yet, given some clarity on the Fed’s interest rate path and high chances of a soft landing of the U.S. economy, the lending scenario improved marginally. Per the Fed’s latest data, demand for commercial and industrial, real estate and consumer loans was decent in January and February.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.84 trillion, suggesting a 6.2% rise from the year-ago reported number. Our estimate for the metric is $2.83 trillion.
Management expects NII (FTE) to be in the upper end of the $13.9-$14 billion range. The Zacks Consensus Estimate for NII (FTE basis) of $13.95 billion suggests a 4.4% decrease. Our estimate for NII (FTE) implies a fall of 3.4% to $14.09 billion.
Other Factors at Play
Trading Income: Client activity was decent in the first quarter. The expectations of a soft landing of the U.S. economy, gradually cooling inflation and clarity on the Fed rate path drove the client activity. However, volatility was lower 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 $5.02 billion suggests a 1% fall from the year-ago reported number. Our estimate for the metric is the same as the consensus figure.
Management projects quarterly trading revenues to be stable with the prior-year quarter, which saw record revenues. This is expected to be majorly driven by robust equity markets performance.
Investment Banking (IB) Fees: Global mergers and acquisitions (M&As) bounced back in the first quarter of 2024 after subdued 2023 and 2022. Both deal value and volume witnessed a noteworthy comeback driven by solid financial performances, fading recession risks, buoyant markets and expected rate cuts this year. Nevertheless, tough scrutiny by antitrust regulators and lingering geopolitical tensions continue to be concerns.
Likewise, the IPO market activity was decent in the first quarter on the back of robust equity market performance. This also drove some activity in follow-up equity issuances. Further, bond issuance volume was boosted by lower yields and a better operating backdrop compared with the last year. So, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have recorded some improvement during the to-be-reported quarter.
The company projects IB revenues to rise in the range of 10-15% on a year-over-year basis.
The Zacks Consensus Estimate for IB income of $1.34 billion indicates a rise of 15.3% from the prior-year quarter level. We expect IB income to be $1.32 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 $700-$800 million higher than the fourth quarter of 2023. Thus, first-quarter expenses are expected to be around $16.4 billion. This, includes elevated payroll tax expense and the expected costs of higher revenue in sales and trading, and wealth management, as well as merit cost increases.
Our estimate for non-interest expenses stands at $16.4 billion, implying an increase of 1%.
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 the expectations of an economic slowdown. Our estimate for provision for credit losses is pegged at $1.38 billion, indicating a surge of 48.3% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $5.92 billion implies a 51.2% jump year over year. Our estimate for the metric is pegged at $4.2 billion.
What the Zacks Model Shows
Our proven model does not conclusively predict an earnings beat for BAC this time. This is because it doesn’t have 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 -0.38%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
The Zacks Consensus Estimate for first-quarter earnings is pegged at 76 cents, which has moved 1.3% lower over the past seven days. The number suggests a decline of 19.2% from the year-ago reported number. Our estimate for earnings is 77 cents.
The consensus estimate for sales of $25.31 billion indicates a 3.6% fall. Our estimate for sales is $25.17 billion, implying a decrease of 4.1%.
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 PNC Financial Services (PNC - Free Report) is +2.05% and it carries a Zacks Rank #3 at present. The company is slated to report first-quarter 2024 results on Apr 16.
Over the past seven days, the Zacks Consensus Estimate for PNC’s quarterly earnings has moved almost 1% north to $3.09.
Image: Bigstock
High Rates, Loans, IB to Support BofA's (BAC) Q1 Earnings
Bank of America (BAC - Free Report) is scheduled to report first-quarter 2024 results on Apr 16, before the opening bell. Despite being the most interest rate-sensitive among its peers, the increase in the company’s net interest income (NII) is likely to have been subdued in the quarter.
The Federal Reserve kept the interest rates unchanged in the quarter at a 22-year high of 5.25-5.5%. 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 metrics. The inverted yield curve in the March-ended quarter is likely to have further aggravated the matter.
Yet, given some clarity on the Fed’s interest rate path and high chances of a soft landing of the U.S. economy, the lending scenario improved marginally. Per the Fed’s latest data, demand for commercial and industrial, real estate and consumer loans was decent in January and February.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.84 trillion, suggesting a 6.2% rise from the year-ago reported number. Our estimate for the metric is $2.83 trillion.
Management expects NII (FTE) to be in the upper end of the $13.9-$14 billion range. The Zacks Consensus Estimate for NII (FTE basis) of $13.95 billion suggests a 4.4% decrease. Our estimate for NII (FTE) implies a fall of 3.4% to $14.09 billion.
Other Factors at Play
Trading Income: Client activity was decent in the first quarter. The expectations of a soft landing of the U.S. economy, gradually cooling inflation and clarity on the Fed rate path drove the client activity. However, volatility was lower 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 $5.02 billion suggests a 1% fall from the year-ago reported number. Our estimate for the metric is the same as the consensus figure.
Management projects quarterly trading revenues to be stable with the prior-year quarter, which saw record revenues. This is expected to be majorly driven by robust equity markets performance.
Investment Banking (IB) Fees: Global mergers and acquisitions (M&As) bounced back in the first quarter of 2024 after subdued 2023 and 2022. Both deal value and volume witnessed a noteworthy comeback driven by solid financial performances, fading recession risks, buoyant markets and expected rate cuts this year. Nevertheless, tough scrutiny by antitrust regulators and lingering geopolitical tensions continue to be concerns.
Likewise, the IPO market activity was decent in the first quarter on the back of robust equity market performance. This also drove some activity in follow-up equity issuances. Further, bond issuance volume was boosted by lower yields and a better operating backdrop compared with the last year. So, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have recorded some improvement during the to-be-reported quarter.
The company projects IB revenues to rise in the range of 10-15% on a year-over-year basis.
The Zacks Consensus Estimate for IB income of $1.34 billion indicates a rise of 15.3% from the prior-year quarter level. We expect IB income to be $1.32 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 $700-$800 million higher than the fourth quarter of 2023. Thus, first-quarter expenses are expected to be around $16.4 billion. This, includes elevated payroll tax expense and the expected costs of higher revenue in sales and trading, and wealth management, as well as merit cost increases.
Our estimate for non-interest expenses stands at $16.4 billion, implying an increase of 1%.
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 the expectations of an economic slowdown. Our estimate for provision for credit losses is pegged at $1.38 billion, indicating a surge of 48.3% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $5.92 billion implies a 51.2% jump year over year. Our estimate for the metric is pegged at $4.2 billion.
What the Zacks Model Shows
Our proven model does not conclusively predict an earnings beat for BAC this time. This is because it doesn’t have 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 -0.38%.
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 first-quarter earnings is pegged at 76 cents, which has moved 1.3% lower over the past seven days. The number suggests a decline of 19.2% from the year-ago reported number. Our estimate for earnings is 77 cents.
The consensus estimate for sales of $25.31 billion indicates a 3.6% fall. Our estimate for sales is $25.17 billion, implying a decrease of 4.1%.
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 PNC Financial Services (PNC - Free Report) is +2.05% and it carries a Zacks Rank #3 at present. The company is slated to report first-quarter 2024 results on Apr 16.
Over the past seven days, the Zacks Consensus Estimate for PNC’s quarterly earnings has moved almost 1% north to $3.09.
Truist Financial (TFC - Free Report) is scheduled to release first-quarter 2024 earnings on Apr 22. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.83%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
TFC’s quarterly earnings estimates have remained unchanged at 78 cents over the past week.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.