One of the biggest banks in the United States, Bank of America (BAC Quick QuoteBAC - Free Report) , is scheduled to announce third-quarter 2024 results on Oct. 15, before the opening bell. 

Among BAC’s close peers, JPMorgan (JPM Quick QuoteJPM - Free Report) is scheduled to release quarterly numbers on Oct. 11 and Citigroup (C Quick QuoteC - Free Report) is slated to announce results on Oct. 15. Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.

Warren Buffett has dumped BAC shares worth more than $10 billion since mid-July. This has lowered his stake in the company to 10.1%. 

The BAC stock has lost 9.2% since Buffett began selling on July 17. What should investors’ stance be in such a situation ahead of third-quarter earnings? Let’s find this out.

Bank of America has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat being 6.35%.

Surprise History
 

Image Source: Zacks Investment Research

Now, let’s check out how Bank of America is expected to fare this time in terms of revenues and earnings. The Zacks Consensus Estimate for the third-quarter revenues of $25.33 billion suggests a slight improvement on a year-over-year basis.

In the past seven days, the consensus estimate for earnings for the to-be-reported quarter has been revised 2.5% lower to 78 cents, indicating a 13.3% decline from the prior-year quarter.

Estimate Revision Trend
 

Image Source: Zacks Investment Research

Factors to Influence BAC’s Q3 Performance

Net Interest Income (NII): Despite being the most interest rate-sensitive among its peers, growth in Bank of America’s NII is likely to have been subdued in the third quarter.

On Sept. 18, the Federal Reserve cut the interest rates by 50 basis points to 4.75-5% for the first time since March 2020. The development is less likely to have much impact on BAC’s NII during the third quarter. Further, relatively higher rates might have hurt the company’s NII growth prospects because of elevated funding/deposit costs and an inverted yield curve during the major part of the quarter. 

Yet, clarity on the Fed’s rate cut path and the stabilizing macroeconomic backdrop are likely to have provided support to the lending scenario. Per the Fed’s latest data, the demand for commercial and industrial, real estate and consumer loans was modest in the first two months of the quarter.

Management expects NII (FTE) to rise modestly on a sequential basis. 

The Zacks Consensus Estimate for NII (FTE basis) of $14.11 billion suggests a 2.9% decrease from the year-ago quarter. Our estimate for NII (FTE) is $14.27 billion.

Trading Income: Client activity and market volatility were decent in the third quarter. The likelihood of a soft landing of the U.S. economy, cooling inflation and easing monetary policy drove the client activity. Hence, BAC is likely to have recorded a decent performance in trading revenues this time.

Management projects trading revenues grow at a low-single-digit percentage from the prior-year quarter. 

The Zacks Consensus Estimate for total sales and trading revenues of $4.6 billion suggests 4.5% growth from the year-ago reported number. Our estimate for the metric is the same as the consensus figure.

Investment Banking (IB) Fees: Global mergers and acquisitions (M&As) in the third quarter of 2024 witnessed marked improvement after subdued 2023 and 2022. Both deal value and volume were decent during the quarter. This was largely driven by solid financial performance, buoyant markets, interest rate cuts and higher chances of a soft landing of the U.S. economy. However, tough scrutiny by antitrust regulators and lingering geopolitical tensions were headwinds. Hence, Bank of America’s advisory fees are likely to have recorded a decent rise.

On the other hand, the IPO market saw signs of cautious optimism driven by market volatility, geopolitical challenges and global monetary policy easing. The impressive equity market performance drove some solid activity in follow-up equity issuances. Further, bond issuance volume improved on favorable economic conditions and corporate spreads at near historical lows. So, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have witnessed some improvement during the to-be-reported quarter.

The company projects IB revenues to be “basically flattish” year over year.

The Zacks Consensus Estimate for IB income of $1.37 billion indicates a rise of 15.5% from the prior-year quarter. We expect IB income to be $1.54 billion.

Expenses: While BAC managed expenses prudently in the past, expansion into newer markets by opening financial centers and efforts to digitize operations and upgrade existing financial centers are expected to have kept non-interest expenses elevated in the to-be-reported quarter.

Management expects non-interest expenses in the third quarter to be relatively stable sequentially.

Our estimate for non-interest expenses stands at $16.3 billion.

Asset Quality: Bank of America is expected to have set aside a substantial amount of money for potential bad loans (mainly in commercial & industrial and commercial real estate loan portfolios), given the expectations of an economic slowdown. Our estimate for provision for credit losses is pegged at $1.44 billion, indicating a rise of 16.8% on a year-over-year basis.

The Zacks Consensus Estimate for non-performing loans of $6 billion implies a 24.6% jump year over year. Our estimate for the metric is pegged at $4.93 billion.

What Our Model Predicts for Bank of America

Our proven model doesn’t predict an earnings beat for Bank of America this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.

Bank of America has an Earnings ESP of -1.36%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

It carries a Zacks Rank #3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

BAC’s Price Performance & Valuation

After a solid start to 2024, where BAC stock was among the top five banks on the S&P 500 Index, it seems to have lost momentum. In the nine months ended Sept. 30, BAC shares have been up only 17.8%. Meanwhile, the industryy and the S&P 500 Index have risen 19.3% and 20.5%, respectively. Also, BAC stock is trading below its peers — JPM and C.

Price Performance (Period ended Sept. 30, 2024)
 

Image Source: Zacks Investment Research

Let’s look at the value Bank of America offers investors at current levels. 

Bank of America stock is currently trading at a 12-month trailing price-to-tangible book (P/TB) of 1.60X. This is below the industry’s 2.08X. This shows the stock is inexpensive currently.

Price-to-Tangible Book Ratio (TTM)
 

Image Source: Zacks Investment Research

BAC stock is trading at a discount compared with JPM, which has a P/TB of 2.42X. On the other hand, Citigroup has a P/TB of 0.74X, making it inexpensive compared with BAC.

How to Play Bank of America Stock Now

The interest rate pressure that Bank of America faced last year has subsided to some extent, and risks surrounding deposit outflows have abated. Further, with the interest rates coming down as the central bank eases monetary policy, the company is likely to gain from that. The industry-wide lending scenario is also expected to improve and the company will benefit from the same.
    
Moreover, Bank of America’s aggressive branch expansion across the United States as part of a broader strategy to solidify customer relationships and tap into new markets will drive NII growth over time. The company announced plans to open more than 165 new financial centers by 2026-end. This will also help capitalize on cross-selling opportunities over the long term. 

Nonetheless, BAC continues to face adverse impacts from prolonged higher rates, leading to high deposit costs. Also, the volatile nature of the capital markets business is expected to make fee income growth challenging. Mounting operating expenses and deteriorating asset quality are other headwinds.

While Bank of America's prospects remain promising as the banking industry regains momentum, investors should not rush to buy the stock. Those interested in adding it to their portfolios might be better off waiting until after the release of quarterly numbers for clarity and a potentially attractive entry point.

Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term.