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Will Slowdown in Trading Impact BofA's (BAC) Q4 Earnings?

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The expected decline in Bank of America’s (BAC - Free Report) trading income is likely to adversely impact fourth-quarter 2017 earnings, slated on Wednesday, Jan 17. However, this is not expected to lead to dismal results as gains from higher rates, decent loan growth and relatively better performance of the other segments — mainly investment banking — are anticipated to offset the trading weakness.

Moreover, though market volatility has not improved much in the last quarter, the decrease in trading revenues will primarily be due to comparison with the prior-year quarter that witnessed higher volatility following the U.S. Presidential election results.

At an investor conference in early December 2017, BofA CEO Brian Moynihan, stated that the company’s trading business till then in the fourth quarter was down roughly 15% year over year. In fact, there has been hardly any change in the scenario since then.

However, the Zacks Consensus Estimate for Global Markets segment (under which trading revenues are accounted for) revenues of $3.54 billion reflects a marginal rise of 1.9% from the prior quarter.

Here are the other factors that are likely influence BofA’s Q4 results:

Continuation of investment banking strength: The trend of pocketing advisory and underwriting fees is expected to have continued in the to-be-reported quarter largely on the back of higher debt origination and equity issuances.

However, weaker M&A activity in terms of deals closed despite significant new M&As announced in the fourth quarter will have a slight adverse effect on advisory fees. But as BofA is one of the leading players in this space, it might not suffer a significant loss.

Overall, the company projects investment banking income to be up in mid-single-digits range in the fourth quarter. For BofA, investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment revenues of $4.92 billion reflects a rise of 8.2% year over year.

Steady rise in net interest income: In addition to higher interest rates, a moderate improvement in lending — particularly, in the areas of commercial and industrial, real estate and consumer — will likely result in improvement in net interest income (NII). Further, management expects NII in the to-be-reported quarter to increase sequentially, driven by modest growth in loans and deposits.

Slowdown in mortgage banking: With the refinance boom nearing its end, a big help is not expected from this division. Seasonality is also expected to hurt mortgage banking revenues. Moreover, BofA hasn’t bulked up its mortgage banking businesses since the last recession. However, the Zacks Consensus Estimate for the Consumer Banking segment (under which mortgage fees are accounted for) revenues of $8.91 billion indicates 9.8% improvement from the prior-year quarter.

Reduced scope of cost control: Expense reduction, which has long been the main method to remain profitable, is not expected to be the primary support this quarter. But 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 are likely to remain more or less stable.

Adverse impact of new tax code: In December 2017 (following the passage of the tax act), BofA announced expectation of one-time charge of $3 billion in the fourth quarter related to write-down of certain net deferred tax assets.

Here is what our quantitative model predicts:

BofA does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing 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.

Zacks ESP: The Earnings ESP for BofA is -1.14%.

Zacks Rank: BofA sports a Zacks Rank #1 (Strong Buy), which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of 44 cents reflects 10% growth on a year-over-year basis. Also, the Zacks Consensus Estimate for sales of $21.3 billion shows 6.5% rise from the prior-year quarter.

Stocks to Consider

Here are a few major 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 Jan 16. It has an Earnings ESP of +0.43% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for U.S. Bancorp (USB - Free Report) is +0.13% and it carries a Zacks Rank 3. The company is scheduled to release results on Jan 17.

The Earnings ESP for SunTrust (STI - Free Report) is +0.27% and it carries a Zacks Rank #2. The company is scheduled to release results on Jan 19.

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