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High Rates to Aid BofA (BAC) Q3 Earnings, IB & Trading to Hurt
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Bank of America (BAC - Free Report) is scheduled to announce third-quarter 2023 earnings on Oct 17, before the opening bell. Despite being the most interest rate sensitive among its peers, the company’s net interest income (NII) is less likely to have improved considerably in the quarter.
The Federal Reserve raised the rates by 25 basis points to a 22-year high of 5.25-5.5% during the third quarter. This is likely to have supported BAC’s NII and net interest margin (NIM). But the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, is expected to have weighed on both NII and NIM.
The situation is likely to have aggravated further owing to the inversion of the yield curve in the September-ended quarter and rising deposit cost. Also, a weak lending scenario amid an uncertain macroeconomic backdrop is expected to have hampered NII and NIM growth. Per the Fed’s latest data, the demand for commercial and industrial loans was soft in July and August, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.76 trillion, suggesting a 3.4% rise from the year-ago reported number. Our estimate for the metric is $2.74 trillion, indicating a 2.6% increase.
Management expects NII (FTE) to be stable sequentially at $14.3 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14.24 billion suggests a 2.7% increase. Our estimate for NII (FTE) implies a rise of 2.8% to $14.26 billion.
Other Factors at Play
Trading Income: Market volatility and client activity were subdued in the third quarter on seasonality. While the risk of a near-term recession has faded, headwinds, including economic slowdown, the central bank’s hawkish monetary policy and geopolitical issues led to ambiguity among investors. Thus, these factors resulted in lower volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is less likely to have recorded a solid performance in trading revenues this time. Tougher comps from the prior year are also expected to have weighed on its performance.
The Zacks Consensus Estimate for total sales and trading revenues of $3.94 billion suggests a 3.8% decline year over year. Our estimate for the metric is the same as the consensus number.
Investment Banking (IB) Fees: Global deal-making witnessed a slight rebound in the third quarter, but on a year-over-year basis, M&A activities remained soft. Headwinds like geopolitical tensions, government shutdown, ‘sticky’ inflation, high interest rates and fears of a global economic slowdown continued to weigh on deal-making. Thus, the deal volume and total value numbers crashed in the third quarter.
Further, the IPO market witnessed considerable activity, with a total of 26 initial public offerings jointly raising $7.7 billion in the quarter. The amount matches the total proceeds raised in the whole of 2022. The performance was still subdued and nowhere near normal. Also, follow-up equity issuances were soft in the to-be-reported quarter, while bond issuance volume improved from the prior-year quarter. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been slightly hurt during the to-be-reported quarter.
At the Barclays Global Financial Services Conference in early September, BAC's chief financial officer, Alastair Borthwick, said that IB fees for the sector are down 30-35% in the third quarter from the year-earlier quarter. However, Bank of America's IB performance is expected to be better than the average.
Borthwick stated, “We'll do slightly better than that, but that still puts the investment banking fees, which are probably right around $1 billion mark.”
The Zacks Consensus Estimate for IB income of $1.12 billion indicates a fall of 4.1% from the prior-year quarter level. We expect IB income to be $1.14 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers, as well as efforts to digitize operations and upgrade existing financial centers, are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
The company expects expenses in the third quarter of 2023 to be roughly $15.8 billion, indicating a rise of more than 3%. Our estimate for non-interest expenses stands at $15.81 billion, implying an increase of 3.7% on a year-over-year basis.
Asset Quality: Bank of America is likely to have set aside substantial money for potential bad loans, given the global economic slowdown risk due to geopolitical and macroeconomic concerns and tighter financial conditions. Our estimate for provision for credit losses is pegged at $1.24 billion.
The Zacks Consensus Estimate for non-performing assets of $4.48 billion implies a 14.9% increase year over year. Our estimate for the metric is pegged at $4.24 billion, suggesting a 6.3% rise.
What the Zacks Model Shows
Our proven model predicts an earnings beat for BofA this time. This is because it has 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 +1.03%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
The Zacks Consensus Estimate for third-quarter earnings is pegged at 81 cents, which has remained unchanged over the past seven days. The number is on par with the year-ago reported number. Our estimate for earnings is 78 cents.
The consensus estimate for sales of $25.12 billion indicates 2.5% growth. Our estimate for sales is $24.57 billion, reflecting a rise of 0.3%.
Other Major Banks to Consider
Here are a couple of other major 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:
The Earnings ESP for Wells Fargo (WFC - Free Report) is +2.11% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2023 results on Oct 13.
Over the past seven days, the Zacks Consensus Estimate for WFC’s quarterly earnings has moved almost 1% north.
Image: Bigstock
High Rates to Aid BofA (BAC) Q3 Earnings, IB & Trading to Hurt
Bank of America (BAC - Free Report) is scheduled to announce third-quarter 2023 earnings on Oct 17, before the opening bell. Despite being the most interest rate sensitive among its peers, the company’s net interest income (NII) is less likely to have improved considerably in the quarter.
The Federal Reserve raised the rates by 25 basis points to a 22-year high of 5.25-5.5% during the third quarter. This is likely to have supported BAC’s NII and net interest margin (NIM). But the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, is expected to have weighed on both NII and NIM.
The situation is likely to have aggravated further owing to the inversion of the yield curve in the September-ended quarter and rising deposit cost. Also, a weak lending scenario amid an uncertain macroeconomic backdrop is expected to have hampered NII and NIM growth. Per the Fed’s latest data, the demand for commercial and industrial loans was soft in July and August, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.76 trillion, suggesting a 3.4% rise from the year-ago reported number. Our estimate for the metric is $2.74 trillion, indicating a 2.6% increase.
Management expects NII (FTE) to be stable sequentially at $14.3 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14.24 billion suggests a 2.7% increase. Our estimate for NII (FTE) implies a rise of 2.8% to $14.26 billion.
Other Factors at Play
Trading Income: Market volatility and client activity were subdued in the third quarter on seasonality. While the risk of a near-term recession has faded, headwinds, including economic slowdown, the central bank’s hawkish monetary policy and geopolitical issues led to ambiguity among investors. Thus, these factors resulted in lower volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is less likely to have recorded a solid performance in trading revenues this time. Tougher comps from the prior year are also expected to have weighed on its performance.
The Zacks Consensus Estimate for total sales and trading revenues of $3.94 billion suggests a 3.8% decline year over year. Our estimate for the metric is the same as the consensus number.
Investment Banking (IB) Fees: Global deal-making witnessed a slight rebound in the third quarter, but on a year-over-year basis, M&A activities remained soft. Headwinds like geopolitical tensions, government shutdown, ‘sticky’ inflation, high interest rates and fears of a global economic slowdown continued to weigh on deal-making. Thus, the deal volume and total value numbers crashed in the third quarter.
Further, the IPO market witnessed considerable activity, with a total of 26 initial public offerings jointly raising $7.7 billion in the quarter. The amount matches the total proceeds raised in the whole of 2022. The performance was still subdued and nowhere near normal. Also, follow-up equity issuances were soft in the to-be-reported quarter, while bond issuance volume improved from the prior-year quarter. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been slightly hurt during the to-be-reported quarter.
At the Barclays Global Financial Services Conference in early September, BAC's chief financial officer, Alastair Borthwick, said that IB fees for the sector are down 30-35% in the third quarter from the year-earlier quarter. However, Bank of America's IB performance is expected to be better than the average.
Borthwick stated, “We'll do slightly better than that, but that still puts the investment banking fees, which are probably right around $1 billion mark.”
The Zacks Consensus Estimate for IB income of $1.12 billion indicates a fall of 4.1% from the prior-year quarter level. We expect IB income to be $1.14 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers, as well as efforts to digitize operations and upgrade existing financial centers, are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
The company expects expenses in the third quarter of 2023 to be roughly $15.8 billion, indicating a rise of more than 3%. Our estimate for non-interest expenses stands at $15.81 billion, implying an increase of 3.7% on a year-over-year basis.
Asset Quality: Bank of America is likely to have set aside substantial money for potential bad loans, given the global economic slowdown risk due to geopolitical and macroeconomic concerns and tighter financial conditions. Our estimate for provision for credit losses is pegged at $1.24 billion.
The Zacks Consensus Estimate for non-performing assets of $4.48 billion implies a 14.9% increase year over year. Our estimate for the metric is pegged at $4.24 billion, suggesting a 6.3% rise.
What the Zacks Model Shows
Our proven model predicts an earnings beat for BofA this time. This is because it has 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 +1.03%.
Zacks Rank: BAC currently carries a Zacks Rank #3.
Bank of America Corporation Price and EPS Surprise
Bank of America Corporation price-eps-surprise | Bank of America Corporation Quote
The Zacks Consensus Estimate for third-quarter earnings is pegged at 81 cents, which has remained unchanged over the past seven days. The number is on par with the year-ago reported number. Our estimate for earnings is 78 cents.
The consensus estimate for sales of $25.12 billion indicates 2.5% growth. Our estimate for sales is $24.57 billion, reflecting a rise of 0.3%.
Other Major Banks to Consider
Here are a couple of other major 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:
The Earnings ESP for Wells Fargo (WFC - Free Report) is +2.11% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2023 results on Oct 13.
Over the past seven days, the Zacks Consensus Estimate for WFC’s quarterly earnings has moved almost 1% north.
JPMorgan (JPM - Free Report) is also scheduled to release third-quarter 2023 earnings on Oct 13. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +1.18%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JPM’s quarterly earnings estimates have moved marginally upward over the past week.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.