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Trading, Tough Backdrop to Hurt BofA's (BAC) Q2 Earnings

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Similar to the first three months of 2019, the second quarter witnessed lower volatility and fall in client activity. Hence, Bank of America’s (BAC - Free Report) trading revenues are expected to fall. As trading revenues are an important part of the bank’s top line, this will likely have an adverse impact on its earnings slated on Jul 17.

During the second quarter, a few concerns, including some lingering ones from the prior quarters like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown persisted. The Federal Reserve’s policy accommodation stance led to ambiguity as well. All these factors weighed on investors’ mind, resulting in lower volatility, and failed to keep trading desks busy.

Therefore, BofA’s trading revenues in the to-be-reported are expected to be muted. Further, during an investors’ conference in late May, CEO Brian Moynihan had commented that trading revenues will likely decline 8% sequentially and 10% year over year.

The Zacks Consensus Estimate for Global Markets segment (under which trading revenues are accounted for) net revenues of $4.13 billion indicates a decline of 2.1% from the year-ago reported number.

Here are some other factors that are expected to influence BofA’s second-quarter results:

Dismal investment banking performance: While dealmakers across the globe were active during the second quarter, M&A deal value and volume witnessed a decline owing to rise in borrowing costs and several geopolitical concerns. So, this will hurt the bank’s advisory fees. However, with BofA being one of the leading players in this space, this will likely provide the company some leverage.

Further, decent equity markets performance and the central banks’ dovish stance seem to have supported equity issuance across the globe. Nonetheless, relatively higher rates and several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter. So, BofA’s equity and debt underwriting fees (accounting for almost 40% of total investment banking fees) are expected to improve marginally.

BofA’s investment banking revenues are accounted in its Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $5.04 billion suggests a 2.4% rise.

Net interest income not of much support: A dismal lending picture — mainly in the areas of commercial and industrial, and real estate — during the second quarter will likely have an adverse impact on net interest income (NII). Further, the central bank’s accommodative stance along with flattening of the yield curve and steadily rising deposit betas will hurt BofA’s net interest yield.

Though the consensus estimate for average interest earning assets of $2.02 trillion for the second quarter indicates a rise of 1.9% from the year-ago reported figure, muted loan growth is expected to hurt BofA’s NII growth.

Management expects NII to be negatively impacted by higher funding of client activity in global markets related to the European dividend season. Also, benefits from loan growth and one additional day of interest will likely be offset by paydowns on year-end credit card balances and higher prepayment of mortgage backed securities.

Further, net interest yield is expected to decline marginally in the second quarter, given the adverse impact of the above-mentioned factors.

Lower scope of cost control: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be a big support for BofA in the to-be reported quarter. Further, as the company continues to digitize banking operations, upgrade technology and 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.

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 -0.18%.

Zacks Rank: BofA carries a Zacks Rank #4 (Sell).

Bank of America Corporation Price and EPS Surprise


Bank of America Corporation Price and EPS Surprise

Bank of America Corporation price-eps-surprise | Bank of America Corporation Quote

Notably, the Zacks Consensus Estimate for earnings of 70 cents indicates 11.1% rise from the year-ago reported figure. Also, the consensus estimate for sales of $23 billion suggests 1.6% increase.

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 the earnings beat this time around:

The Earnings ESP for Wells Fargo (WFC - Free Report) is +0.87% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 16.

PNC Financial (PNC - Free Report) is scheduled to release results on Jul 17. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +1.59%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T (BBT - Free Report) is scheduled to release results on Jul 18. It has an Earnings ESP of +0.74% and a Zacks Rank #3.

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