Bank of America Corp. (BAC - Analyst Report) is slated to release third-quarter 2016 results on Monday, Oct 17, before the opening bell. Notably, of late, the company’s earnings estimates have been relatively stable. So, what to expect from the company in the upcoming earnings release?
Last quarter, improved fixed income trading revenues and efficient expense control helped BofA to surpass the Zacks Consensus Estimate. However, these were partially offset by weaknesses in equity trading revenues, investment banking fees and mortgage banking revenues.
The earnings beat translated into improved share price movement. For the three-month period ended Sep 30, BofA stock was up nearly 18%. This indicates that the company’s business activities were cheered by the investors.
Further, BofA has a decent surprise history, as evident from the chart below:
Factors to Impact Q3 Results
Investment Banking Operations to Improve: At an industry conference early in September, Christian Meissner, head of global corporate and investment-banking business at BofA, announced that investment banking fees are projected to improve in the third quarter on a sequential basis. Recovering oil prices and stabilizing market conditions are the primary reasons for the reversal in the investment banking scenario.
Mortgage Operations to Improve: Lower mortgage rates should have given a boost to BofA’s mortgage banking revenues. Nonetheless, any substantial improvement in outstanding mortgage loans is unlikely. This is because the volume of repayment and charge-off of mortgage loans was more than the fresh originations.
Efficient Cost Control: In the absence of additional legal costs and provisions, operating expenses should remain stable in the quarter, aided by the success of its cost-saving efforts and other restructuring initiatives. Management targets core expenses to be around $13 billion during the quarter.
Trading Revenues on a Rebound: Over the last few quarters, BofA has been experiencing a slump in trading revenues. However, similar to the prior quarter, we anticipate fixed income trading revenues to grow, while equity trading should continue to witness lackluster performance during the quarter.
Net Interest Margin under Persistent Strain: As the Fed has not increased the interest rates this year, BofA should continue facing margin compression. Notably, net interest margin for the company had declined in the first half of 2016 too. We believe that this trend is likely to continue during the third quarter as well.
Exposure to Energy Sector Loans to Weigh on Credit Quality: Given the significant exposure in energy-sector lending (4.3% of total commercial credit exposure as of Jun 30, 2016), BofA will likely witness a slight rise in provision for loan losses in the quarter. Though oil prices have rebounded marginally, we don’t expect this to have any substantial positive effect on the company’s asset quality.
Chances of BofA beating the Zacks Consensus Estimate in the third quarter are quite low. 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 increasing chances of an earnings beat.
Zacks ESP: The Earnings ESP for BofA is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 34 cents.
Zacks Rank: BofA’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.
Additionally, the estimate of 34 cents per share for the upcoming release indicates a year-over-year decline of about 8.8%.
Stocks to Consider
Here are a few finance stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.
State Street Corporation (STT - Analyst Report) has an Earnings ESP of +0.80% and a Zacks Rank #2. It is slated to announce results on Oct 26. You can see the complete list of today’s Zacks #1 Rank stocks here.
Synovus Financial Corporation (SNV - Analyst Report) has an Earnings ESP of +2.00% and a Zacks Rank #3. It is scheduled to report results on Oct 18.
The Goldman Sachs Group, Inc. (GS - Analyst Report) has an Earnings ESP of +1.83% and a Zacks Rank #3. It is slated to report on Oct 18.
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