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Trading & Interest Income to Support BofA (BAC) Q2 Earnings

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After an impressive performance in the first quarter driven by significant volatility, client activity seems to have returned to normalized levels. Hence, Bank of America’s (BAC - Free Report) trading revenues are expected to be relatively stable in second-quarter 2018. As trading revenues are an important part of the bank’s top line, this will likely support to its results slated on Jul 16.

The second quarter witnessed further escalation in the trade war and some other geo-political tensions. But these developments were not sufficient to result in a substantial increase in volatility and thus, client activity remained modest.

Further, at an investors’ conference in May, BofA CEO Brian Moynihan stated that the company’s trading income is expected to be flat year over year in the second quarter.

Nonetheless, the Zacks Consensus Estimate for Global Markets segment (under which trading revenues are accounted for) revenues of $4.12 billion indicates a decline of 14% from the prior quarter.

Here are the other factors that are likely influence BofA’s second-quarter results:

Steady net interest income growth: A modest increase in lending — mainly in the areas of commercial and industrial, and consumer — is expected result in improvement in net interest income (NII). A rise in interest rates will provide some support despite flattening of the yield curve in the second quarter.

Moreover, the Zacks Consensus Estimate for average interest earning assets of $1.99 trillion for the second quarter indicates a marginal sequential improvement. This, along with decent lending activities is expected to further boost BofA’s NII in the to-be-reported quarter.

Notably, management expects NII, on an FTE basis, to decline roughly $120 million owing to the tax act.

Muted investment banking performance: Increase in interest rates is likely to have slowed down corporates’ involvement in debt issuance activities. As debt origination fees account for major portion of total investment banking fees for BofA, this is expected to have an adverse impact on investment banking revenues.

However, strong equity issuances globally are expected to have boosted IPOs and follow-on offerings. So, equity underwriting fees are expected to increase for BofA. Further, increasing M&As will likely lead to a slight rise in advisory revenues for the company.

BofA’s investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment revenues of $5 billion reflects a marginal rise on a sequential basis.

Slowdown in mortgage banking business: With the refinance boom almost coming to end, a significant support is not expected from this operation. Also, home equity loan portfolio is likely to decline in the to-be-reported quarter as mortgage rates continued to move higher. As BofA hasn’t bulked up its mortgage banking businesses since the last recession, mortgage banking is not expected to be a big help for the company.

The Zacks Consensus Estimate for the Consumer Banking segment (under which mortgage fees are accounted for) revenues of $9.2 billion shows 1.8% rise from the prior 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 in the to-be reported quarter. Further, as BofA continues to digitize banking operations, upgrade technology and plans to expand into newer markets, related costs are expected to rise.

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 operating expenses are likely to remain manageable in the second quarter.

In other developments, redemption of the trust preferred securities and the extinguishment of the related junior subordinated notes issued by BofA are expected to result in nearly $800 million of charge in the second quarter.

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 -6.10%.

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

Notably, the Zacks Consensus Estimate for earnings of 62 cents reflects 28.3% growth on a year-over-year basis. However, the consensus estimate for sales of $22.5 billion shows 1.3% fall from the prior-year quarter.

Stocks to Consider

Here are a few major bank stocks that you may want to consider, as our model shows that these have the right combination of elements for an earnings beat this time around:

Wells Fargo (WFC - Free Report) is scheduled to release results on Jul 13. It has an Earnings ESP of +0.33% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

JPMorgan (JPM - Free Report) is scheduled to release results on Jul 13. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +1.19%.

The Earnings ESP for KeyCorp (KEY - Free Report) is +0.47% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 19.

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