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Trading & Investment Banking to Hurt BofA (BAC) Q3 Earnings

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After an impressive performance in first-half 2018 driven by significant volatility, client activity slowed down in the third quarter. So, Bank of America’s (BAC - Free Report) trading revenues are expected to be hurt. As trading revenues are an important part of the bank’s top line, this will likely have an adverse impact to its results slated on Oct 15.

In the first half, higher inflation expectation, tightening of monetary policy by the Fed, the U.S.-China trade war and a sharp sell-off in the tech sector incited volatility. However, developments including further escalation in the trade war and some other geo-political tensions in the third quarter were not enough to result in a significant rise in client activity.

Also, the Zacks Consensus Estimate for Global Markets segment (under which trading revenues are accounted for) net revenues of $4.05 billion indicates a decline of 4.2% from the prior quarter.

Here are some of the other key factors that are expected to influence BofA’s third-quarter results:

Muted investment banking performance: Seasonal slowdown is expected to hamper investment banking performance to some extent in the third quarter. Moreover, global equity markets slowed down with fears of a full-blown trade war weighing on companies’ plans to raise capital by issuing shares. Thus, BofA is likely to witness a modest fall in equity underwriting fees.

Further, rise in interest rates is likely to have lowered companies’ involvement in debt issuance activities. As debt origination fees account for roughly 40% of total investment banking fees for BofA, this will likely have an adverse impact on investment banking revenues.

Also, decline in global M&A deal volume in the third quarter will likely hamper the company’s advisory fees to some extent. Nonetheless, strong M&A deal pipeline over the prior quarters will likely provide respite in the to-be-reported quarter. This, along with BofA being one of the leading players in this space, will likely lead to a slight improvement in advisory revenues.

Therefore, BofA’s investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment net revenues of $5 billion reflects a 1.4% rise on a sequential basis.

Mortgage banking to disappoint: With the refinance boom almost coming to end, a significant support is not expected from this business. 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 consensus estimate for the Consumer Banking segment (under which mortgage fees are accounted for) net revenues of $9.4 billion shows 1.8% rise from the prior quarter.

Steady net interest income growth: A marginal improvement in lending scenario — mainly in the areas of commercial and industrial, and consumer — will likely lead to an increase in net interest income (NII). Rise in interest rates (in June and September) will also offer some support despite flattening of the yield curve and steadily increasing deposit betas in the third quarter.

Further, the consensus estimate for average interest earning assets of $1.98 trillion for the third quarter remained relatively stable on a sequential basis. This, along with decent lending activities, is expected to further lead to a rise in BofA’s NII in the to-be-reported quarter.

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

Lower scope of cost control: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be the primary support for BofA 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 third 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.

Earnings ESP: The Earnings ESP for BofA is -0.08%.

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 the earnings beat.

Notably, the Zacks Consensus Estimate for earnings of 62 cents reflects 29.2% growth on a year-over-year basis. Also, the consensus estimate for sales of $22.6 billion shows 3.4% increase from the prior-year quarter.

Stocks to Consider

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

Comerica (CMA - Free Report) is slated to release results on Oct 16. The company has an Earnings ESP of +0.49% and carries a Zacks Rank of 3.

M&T Bank Corporation (MTB - Free Report) is scheduled to release results on Oct 17. It has an Earnings ESP of +0.41% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Hancock Whitney Corporation (HWC - Free Report) is +0.66% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 16.

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