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Higher Rates, Trading to Aid BofA (BAC) Q4 Earnings, IB to Hurt
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Bank of America (BAC - Free Report) is scheduled to announce fourth-quarter and full-year 2022 earnings on Jan 13, before the market opens. The higher interest rate regime is likely to have considerably bolstered the company’s net interest income (NII) as it is the most interest rate sensitive among its peers.
Supported by a decent lending backdrop, BAC is also expected to have witnessed a solid expansion of its net interest margin (NIM) during the fourth quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans (specifically credit cards) accelerated solidly in October and November.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.74 trillion, suggesting a marginal decline on a year-over-year basis. Our estimate for the metric is $2.94 trillion, indicating a 6.9% rise.
Continuing with its ultra-hawkish monetary policy stance, the Federal Reserve raised the interest rates by another 125 basis points during the quarter. The policy rate has thus reached a 15-year high of 4.25-4.50%. While this is likely to have had a favorable impact on BofA’s NIM and NII, the inversion of the yield curve in the December-ended quarter is expected to have weighed to some extent.
Management expects NII in the fourth quarter to be at least $1.25 billion higher than the third-quarter level.
The Zacks Consensus Estimate for NII on FTE basis of $15.17 billion suggests a 31.7% jump. Our estimate for NII on FTE basis implies a rise of 33.6% to $15.38 billion.
Other Major Factors to Impact Q4 Results
Trading Income: Like the first three quarters of 2022, market volatility and client activity remained robust during the fourth quarter. The developments, including Russia’s invasion of Ukraine and continued supply chain disruptions, led to ambiguity among investors. Also, the ultra-aggressive stance of the central banks across the globe to control inflation and ensuing fears of an economic slowdown/recession drove client activity and trading volume.
These factors led to heightened volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. Hence, BofA is likely to have witnessed growth in trading revenues this time.
The Zacks Consensus Estimate for trading revenues of $3.72 billion suggests a surge of 26.8% from the prior-year quarter’s reported number. Our estimate for the metric is the same as the consensus number.
At an investor conference in December 2022, BofA CEO Brian Moynihan stated that trading revenues will grow 10-15% (with major support from fixed-income trading) year over year.
Investment Banking (IB) Fees: After a stellar 2021 performance, global deal-making hit a record low for the fourth consecutive quarter. Raging inflation, geopolitical tensions, equity markets rout, higher interest rates and fears of recession dealt a blow to the business sentiments and plans for expansion through acquisitions. Thus, both deal volume and total value crashed during the fourth quarter. So, BofA’s advisory fees are likely to have been adversely impacted.
Given similar reasons, both IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the to-be-reported quarter.
Moynihan, at the conference, provided a grim outlook for the IB business. The company expects IB fees to decline 55-60% year over year.
The Zacks Consensus Estimate for IB income of $1.07 billion indicates a plunge of 54.6% from the prior-year quarter level.
Expenses: Though the bank continues to digitize operations, upgrade technology and expand into newer markets by opening branches leading to higher related costs, its prior efforts to improve operating efficiency are likely to have resulted in manageable expense levels in the to-be-reported quarter.
Our estimate for non-interest expenses stands at $15.87 billion, reflecting an increase of 7.8% on a year-over-year basis.
For 2022, management anticipates expenses to be $61 billion. This includes the cost related to the resolution of regulatory and litigation matters. Without that, expenses are expected to be a little more than $60 billion. Our estimate for the same is pegged at $61.8 billion, suggesting a 3.4% rise.
Asset Quality: With an increase in loan balance and expectations of a global recession due to geopolitical and macroeconomic headwinds, BAC is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $476.7 million against a provision benefit of $489 million a year ago.
The Zacks Consensus Estimate for non-performing loans of $4.54 billion implies a slight decrease year over year. Our estimate for the metric is pegged at $4.62 billion, marking a 1.2% increase.
What the Zacks Model Shows
Our proven model does not predict an earnings beat for BofA this time around. This is because it doesn’t have the right combination of the two key ingredients — positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase 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 -4.65%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 80 cents, which has moved 2.4% lower over the past seven days. Further, the estimated figure suggests a fall of 2.4% from the year-ago reported number. Our estimate for earnings is same as the consensus number.
The consensus estimate for sales of $24.3 billion indicates 10.2% growth. Our estimate for sales is $24.19 billion, reflecting a rise of 9.7%.
Banks to Consider
Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for The Bank of New York Mellon Corporation (BK - Free Report) is +6.31% and it carries a Zacks Rank #3, at present. The company is slated to report fourth-quarter and full-year 2022 results on Jan 13.
Over the past seven days, BK’s Zacks Consensus Estimate for quarterly earnings has moved 3.5% north.
Image: Bigstock
Higher Rates, Trading to Aid BofA (BAC) Q4 Earnings, IB to Hurt
Bank of America (BAC - Free Report) is scheduled to announce fourth-quarter and full-year 2022 earnings on Jan 13, before the market opens. The higher interest rate regime is likely to have considerably bolstered the company’s net interest income (NII) as it is the most interest rate sensitive among its peers.
Supported by a decent lending backdrop, BAC is also expected to have witnessed a solid expansion of its net interest margin (NIM) during the fourth quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans (specifically credit cards) accelerated solidly in October and November.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.74 trillion, suggesting a marginal decline on a year-over-year basis. Our estimate for the metric is $2.94 trillion, indicating a 6.9% rise.
Continuing with its ultra-hawkish monetary policy stance, the Federal Reserve raised the interest rates by another 125 basis points during the quarter. The policy rate has thus reached a 15-year high of 4.25-4.50%. While this is likely to have had a favorable impact on BofA’s NIM and NII, the inversion of the yield curve in the December-ended quarter is expected to have weighed to some extent.
Management expects NII in the fourth quarter to be at least $1.25 billion higher than the third-quarter level.
The Zacks Consensus Estimate for NII on FTE basis of $15.17 billion suggests a 31.7% jump. Our estimate for NII on FTE basis implies a rise of 33.6% to $15.38 billion.
Other Major Factors to Impact Q4 Results
Trading Income: Like the first three quarters of 2022, market volatility and client activity remained robust during the fourth quarter. The developments, including Russia’s invasion of Ukraine and continued supply chain disruptions, led to ambiguity among investors. Also, the ultra-aggressive stance of the central banks across the globe to control inflation and ensuing fears of an economic slowdown/recession drove client activity and trading volume.
These factors led to heightened volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. Hence, BofA is likely to have witnessed growth in trading revenues this time.
The Zacks Consensus Estimate for trading revenues of $3.72 billion suggests a surge of 26.8% from the prior-year quarter’s reported number. Our estimate for the metric is the same as the consensus number.
At an investor conference in December 2022, BofA CEO Brian Moynihan stated that trading revenues will grow 10-15% (with major support from fixed-income trading) year over year.
Investment Banking (IB) Fees: After a stellar 2021 performance, global deal-making hit a record low for the fourth consecutive quarter. Raging inflation, geopolitical tensions, equity markets rout, higher interest rates and fears of recession dealt a blow to the business sentiments and plans for expansion through acquisitions. Thus, both deal volume and total value crashed during the fourth quarter. So, BofA’s advisory fees are likely to have been adversely impacted.
Given similar reasons, both IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the to-be-reported quarter.
Moynihan, at the conference, provided a grim outlook for the IB business. The company expects IB fees to decline 55-60% year over year.
The Zacks Consensus Estimate for IB income of $1.07 billion indicates a plunge of 54.6% from the prior-year quarter level.
Expenses: Though the bank continues to digitize operations, upgrade technology and expand into newer markets by opening branches leading to higher related costs, its prior efforts to improve operating efficiency are likely to have resulted in manageable expense levels in the to-be-reported quarter.
Our estimate for non-interest expenses stands at $15.87 billion, reflecting an increase of 7.8% on a year-over-year basis.
For 2022, management anticipates expenses to be $61 billion. This includes the cost related to the resolution of regulatory and litigation matters. Without that, expenses are expected to be a little more than $60 billion. Our estimate for the same is pegged at $61.8 billion, suggesting a 3.4% rise.
Asset Quality: With an increase in loan balance and expectations of a global recession due to geopolitical and macroeconomic headwinds, BAC is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $476.7 million against a provision benefit of $489 million a year ago.
The Zacks Consensus Estimate for non-performing loans of $4.54 billion implies a slight decrease year over year. Our estimate for the metric is pegged at $4.62 billion, marking a 1.2% increase.
What the Zacks Model Shows
Our proven model does not predict an earnings beat for BofA this time around. This is because it doesn’t have the right combination of the two key ingredients — positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase 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 -4.65%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and Consensus
Bank of America Corporation price-consensus-chart | Bank of America Corporation Quote
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 80 cents, which has moved 2.4% lower over the past seven days. Further, the estimated figure suggests a fall of 2.4% from the year-ago reported number. Our estimate for earnings is same as the consensus number.
The consensus estimate for sales of $24.3 billion indicates 10.2% growth. Our estimate for sales is $24.19 billion, reflecting a rise of 9.7%.
Banks to Consider
Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for The Bank of New York Mellon Corporation (BK - Free Report) is +6.31% and it carries a Zacks Rank #3, at present. The company is slated to report fourth-quarter and full-year 2022 results on Jan 13.
Over the past seven days, BK’s Zacks Consensus Estimate for quarterly earnings has moved 3.5% north.
First Republic Bank is scheduled to release fourth-quarter and full-year 2022 earnings on Jan 13. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.25%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
FRC’s quarterly earnings estimates have moved marginally lower over the past week.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.