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Will Tough Operating Backdrop Hurt BofA (BAC) Q2 Earnings?

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Bank of America Corp. (BAC - Free Report) is scheduled to announce second-quarter 2017 results on Tuesday, Jul 18, before the opening bell. Despite investors cheering the company’s latest capital deployment plan, the same is not expected to continue following the earnings release.

While BofA’s performance in the last quarter reflected improved trading revenues, an increase in interest income and higher investment banking fees, challenging operating backdrop is expected dampen the company’s second-quarter earnings.

In May, at an investor conference call, the company CEO Brian T. Moynihan said that second-quarter earnings are likely be hit by fall in trading revenues and lower-than-expected interest rates.

Earnings estimate revisions depict pessimism too. The Zacks Consensus Estimate for the to-be-reported quarter was revised 4.4% downward over the last seven days, with four out of eight estimates moving lower and none moving higher.

Earnings Whispers

Decrease in earnings estimates increase chances of a beat. However, our quantitative model doesn’t conclusively predict the earnings beat this time. Here’s why:

BofA does not have the right combination of two main ingredients – a positive Earnings ESP and Zacks Rank #3 (Hold) or higher – for increasing chances of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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 43 cents.

Zacks Rank: BofA’s Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Nonetheless, the Zacks Consensus Estimate reflects 20.5% improvement on a year-over-year basis. Further, BofA has a decent surprise history, as evident from the chart below:

Factors Impacting Q2 Results

Lack of volatility to hurt trading revenues: For the major part of the quarter, trading activities remained sluggish mainly due to low volatility in both bond and equity markets. While the markets witnessed a marginal rise in volatility almost at the end of quarter, it is not likely to be enough for BofA to record any improvement in trading revenues.

During an investor conference at the end of May, management revealed that the quarter’s trading revenues are expected to be down 10–12% year over year.

Lack of investment banking activities to curb fee income: Global M&A activity remained lackluster. Per the Thomson Reuters data, the total deal value of announced M&As across the world fell during the quarter. Debt underwriting was soft as well, while equity underwriting seems to have improved. But as BofA’s is one of the lead players in this space, it might not suffer a loss.

Mortgage revenues not to be a major support: An expected higher rate environment and less-concerned lenders over regulatory restrictions might have led to a rise in demand for refinancing activities during the quarter, thus helping BofA record some mortgage revenues. However, with the refinance boom nearing its end, no big support is expected from this segment. So, the contribution of mortgage revenue gains to total revenue will not be extraordinary.

Slight rise in net interest income (NII) on modest loan growth: Improvement in loan demand, particularly commercial and industrial, and real estate during quarter is expected to support NII. Nonetheless, management expects $100–$110 million reduction in NII owing to lower-than-expected interest rates and the divestiture of its U.K. consumer credit card operations, MBNA Ltd.  

Reduced scope for significant cost control: Expense reduction, which has long been the main method to remain profitable, is not expected to be the primary support this quarter. In fact, BofA expects to record a charge of $100 million as it closes/sells its data centers.

Nonetheless, given the success of BofA’s cost-saving efforts and other restructuring initiatives as well as absence of significant legal costs and provisions, overall expenses should remain more or less stable.

Stocks to Consider

Here are a few bank stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated (CMA - Free Report) is scheduled to report results on Jul 18. It has an Earnings ESP of +4.67% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated (HBAN - Free Report) has an Earnings ESP of +4.35% and a Zacks Rank #3. It is scheduled to report first-quarter 2017 results on Jul 21.

The Earnings ESP for Zions Bancorporation (ZION - Free Report) is +1.61% and it carries a Zacks Rank #2. The company is scheduled to release results on Jul 25.

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