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Is Bank of America (BAC) Stock a Buy Before Q2 Earnings?
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One of the biggest banks in the United States, Bank of America (BAC - Free Report) , is scheduled to announce second-quarter 2024 results on Jul 16, before the opening bell.
With the BAC stock trading near a two-year high of $41.42, should you buy it ahead of its second-quarter results? Before we analyze the stock’s investment worthiness, it’s time to look at the company’s historical performance and how it is expected to fare this time.
Bank of America has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat being 6.28%.
Image Source: Zacks Investment Research
Now, let’s check out how Bank of America is expected to fare in terms of revenues and earnings. The Zacks Consensus Estimate for the second-quarter revenues of $25.24 billion suggests a slight improvement on a year-over-year basis.
In the past seven days, the consensus estimate for earnings for the to-be-reported quarter has been revised 1.3% lower to 79 cents, indicating a 10.2% decline from the prior-year quarter.
Image Source: Zacks Investment Research
Factors to Impact Q2 Results
Net Interest Income (NII): Despite being the most interest rate-sensitive among its peers, growth in the company’s NII is likely to have been subdued in the second quarter.
In the quarter, the Federal Reserve kept the interest rates unchanged at a more than two-decade high of 5.25-5.5%. 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 metrics. The inverted yield curve in the June-ended quarter is likely to have aggravated the matter.
Yet, given some clarity on the Fed’s interest rate path and high chances of a soft landing of the U.S. economy, the lending scenario improved modestly. Per the Fed’s latest data, demand for commercial and industrial, real estate and consumer loans was decent in April and May.
Management expects NII (FTE) to decline modestly on a sequential basis and approach $14 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14 billion suggests a 2.1% decrease from the year-ago quarter. Our estimate for NII (FTE) implies a fall of 1.6% on a year-over-year basis to $14.1 billion.
Trading Income: Client activity was modest in the second quarter. The expectations of a soft landing of the U.S. economy, gradually cooling inflation numbers and clarity on the Fed rate cut path drove the client activity. However, volatility was low in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is likely to have recorded a decent performance in trading revenues this time.
The Zacks Consensus Estimate for total sales and trading revenues of $4.65 billion suggests an 8.4% growth from the year-ago reported number. Our estimate for the metric is the same as the consensus figure.
Management projects trading revenues grow at a low-single-digit percentage from the prior-year quarter. This is likely to be to be driven by the robust equity market performance, partially offset by stable fixed-income revenues.
Investment Banking (IB) Fees: The rebound in global mergers and acquisitions (M&As) in the second quarter of 2024 after subdued 2023 and 2022 saw noteworthy growth in deal value and volume. This was driven by solid financial performance, fading recession risks, buoyant markets and expected rate cuts later this year. However, tough scrutiny by antitrust regulators and lingering geopolitical tensions were headwinds. Hence, Bank of America’s advisory fees are likely to have recorded a decent rise.
Likewise, the IPO market activity was decent in the second quarter, given the impressive equity market performance. This also drove some solid activity in follow-up equity issuances. Further, bond issuance volume was boosted by lower yields, a better operating backdrop compared with last year, election-related uncertainty and a resurgence in M&As. So, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have witnessed some improvement during the to-be-reported quarter.
The company projects IB revenues to rise in the range of 10-15% on a year-over-year basis.
The Zacks Consensus Estimate for IB income of $1.47 billion indicates a rise of 21.3% from the prior-year quarter level. We expect IB income to be $1.38 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers and efforts to digitize operations and upgrade existing financial centers are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
Management expects expenses in the second quarter to decline sequentially as nearly two-thirds of the first-quarter elevated payroll tax expenses come back out.
Our estimate for non-interest expenses stands at $16.47 billion, implying an increase of 2.7%.
Asset Quality: Bank of America is expected to have set aside a substantial amount of money for potential bad loans (mainly in commercial & industrial and commercial real estate loan portfolios), given the expectations of an economic slowdown and higher rates for a longer time frame. Our estimate for provision for credit losses is pegged at $1.35 billion, indicating a surge of 19.7% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $6.2 billion implies a 45% jump year over year. Our estimate for the metric is pegged at $4.41 billion.
What Our Model Predicts
Our proven model doesn’t predict an earnings beat for Bank of America this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.
Bank of America has an Earnings ESP of -0.46%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Bank of America was among the top five performing banks on the S&P 500 Index in the first half of 2024. The other stocks on the list were Citigroup (C - Free Report) , JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and BNY Mellon (BK - Free Report) . All five stocks outperformed the S&P 500 Index.
First Half 2024 Price Performance Image Source: Zacks Investment Research
JPM, C, BK and WFC are slated to report second-quarter 2024 results on Jul 12.
Let’s look at the value Bank of America offers investors at current levels.
Currently, BAC is trading at 12.19X forward 12 months earnings, above its five-year median of 11.18X. Meanwhile, the industry’s forward earnings multiple sits at 11.45X. The company’s valuation looks somewhat stretched compared with its own range and the industry average.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
Balancing Risk and Reward
Bank of America continues to face adverse impacts from prolonged higher rates, leading to high deposit costs. Also, the tough operating backdrop and volatile nature of the capital markets business are expected to make fee income growth challenging in the near term. Mounting operating expenses is another headwind.
Yet, the interest rate pressure that Bank of America faced last year has subsided to some extent, and risks surrounding deposit outflows have abated. The company’s ambitious expansion initiative to open financial centers in new and existing markets will drive further loan and deposit growth and help capitalize on cross-selling opportunities over the longer term.
BAC also continues to reward shareholders handsomely. As it cleared the 2024 stress test, the company intends to increase its quarterly dividend by 8% to 26 cents per share, beginning in the third quarter of 2024. In the last five years, it increased dividends four times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
Conclusion
The resurgence of IB business, high rates and decent loan demand paint a positive picture for BAC ahead of second-quarter earnings. Nonetheless, concerns over elevated expenses and deteriorating credit quality warrant caution for potential investors.
As the BAC stock is currently trading at almost a two-year high, it reflects investors’ highly bullish expectations from the second-quarter results. There is a fair chance of near-term volatility as the markets interpret and incorporate updates. Further, the company’s stretched valuation warrants a pause.
While Bank of America's prospects remain promising as the banking industry regains momentum, investors should not rush to buy the stock. Those interested in adding it to their portfolios might be better off waiting until after the release of quarterly numbers for clarity and a potentially attractive entry point.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the longer term.
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Is Bank of America (BAC) Stock a Buy Before Q2 Earnings?
One of the biggest banks in the United States, Bank of America (BAC - Free Report) , is scheduled to announce second-quarter 2024 results on Jul 16, before the opening bell.
With the BAC stock trading near a two-year high of $41.42, should you buy it ahead of its second-quarter results? Before we analyze the stock’s investment worthiness, it’s time to look at the company’s historical performance and how it is expected to fare this time.
Bank of America has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat being 6.28%.
Image Source: Zacks Investment Research
Now, let’s check out how Bank of America is expected to fare in terms of revenues and earnings. The Zacks Consensus Estimate for the second-quarter revenues of $25.24 billion suggests a slight improvement on a year-over-year basis.
In the past seven days, the consensus estimate for earnings for the to-be-reported quarter has been revised 1.3% lower to 79 cents, indicating a 10.2% decline from the prior-year quarter.
Image Source: Zacks Investment Research
Factors to Impact Q2 Results
Net Interest Income (NII): Despite being the most interest rate-sensitive among its peers, growth in the company’s NII is likely to have been subdued in the second quarter.
In the quarter, the Federal Reserve kept the interest rates unchanged at a more than two-decade high of 5.25-5.5%. 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 metrics. The inverted yield curve in the June-ended quarter is likely to have aggravated the matter.
Yet, given some clarity on the Fed’s interest rate path and high chances of a soft landing of the U.S. economy, the lending scenario improved modestly. Per the Fed’s latest data, demand for commercial and industrial, real estate and consumer loans was decent in April and May.
Management expects NII (FTE) to decline modestly on a sequential basis and approach $14 billion. The Zacks Consensus Estimate for NII (FTE basis) of $14 billion suggests a 2.1% decrease from the year-ago quarter. Our estimate for NII (FTE) implies a fall of 1.6% on a year-over-year basis to $14.1 billion.
Trading Income: Client activity was modest in the second quarter. The expectations of a soft landing of the U.S. economy, gradually cooling inflation numbers and clarity on the Fed rate cut path drove the client activity. However, volatility was low in equity markets and other asset classes, including commodities, bonds and foreign exchange.
Hence, BAC is likely to have recorded a decent performance in trading revenues this time.
The Zacks Consensus Estimate for total sales and trading revenues of $4.65 billion suggests an 8.4% growth from the year-ago reported number. Our estimate for the metric is the same as the consensus figure.
Management projects trading revenues grow at a low-single-digit percentage from the prior-year quarter. This is likely to be to be driven by the robust equity market performance, partially offset by stable fixed-income revenues.
Investment Banking (IB) Fees: The rebound in global mergers and acquisitions (M&As) in the second quarter of 2024 after subdued 2023 and 2022 saw noteworthy growth in deal value and volume. This was driven by solid financial performance, fading recession risks, buoyant markets and expected rate cuts later this year. However, tough scrutiny by antitrust regulators and lingering geopolitical tensions were headwinds. Hence, Bank of America’s advisory fees are likely to have recorded a decent rise.
Likewise, the IPO market activity was decent in the second quarter, given the impressive equity market performance. This also drove some solid activity in follow-up equity issuances. Further, bond issuance volume was boosted by lower yields, a better operating backdrop compared with last year, election-related uncertainty and a resurgence in M&As. So, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have witnessed some improvement during the to-be-reported quarter.
The company projects IB revenues to rise in the range of 10-15% on a year-over-year basis.
The Zacks Consensus Estimate for IB income of $1.47 billion indicates a rise of 21.3% from the prior-year quarter level. We expect IB income to be $1.38 billion.
Expenses: While BAC was able to manage expenses prudently in the past, expansion into newer markets by opening financial centers and efforts to digitize operations and upgrade existing financial centers are expected to have kept non-interest expenses elevated in the to-be-reported quarter.
Management expects expenses in the second quarter to decline sequentially as nearly two-thirds of the first-quarter elevated payroll tax expenses come back out.
Our estimate for non-interest expenses stands at $16.47 billion, implying an increase of 2.7%.
Asset Quality: Bank of America is expected to have set aside a substantial amount of money for potential bad loans (mainly in commercial & industrial and commercial real estate loan portfolios), given the expectations of an economic slowdown and higher rates for a longer time frame. Our estimate for provision for credit losses is pegged at $1.35 billion, indicating a surge of 19.7% on a year-over-year basis.
The Zacks Consensus Estimate for non-performing loans of $6.2 billion implies a 45% jump year over year. Our estimate for the metric is pegged at $4.41 billion.
What Our Model Predicts
Our proven model doesn’t predict an earnings beat for Bank of America this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.
Bank of America has an Earnings ESP of -0.46%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
It carries a Zacks Rank #3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price Performance and Valuation
Bank of America was among the top five performing banks on the S&P 500 Index in the first half of 2024. The other stocks on the list were Citigroup (C - Free Report) , JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and BNY Mellon (BK - Free Report) . All five stocks outperformed the S&P 500 Index.
First Half 2024 Price Performance
Image Source: Zacks Investment Research
JPM, C, BK and WFC are slated to report second-quarter 2024 results on Jul 12.
Let’s look at the value Bank of America offers investors at current levels.
Currently, BAC is trading at 12.19X forward 12 months earnings, above its five-year median of 11.18X. Meanwhile, the industry’s forward earnings multiple sits at 11.45X. The company’s valuation looks somewhat stretched compared with its own range and the industry average.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
Balancing Risk and Reward
Bank of America continues to face adverse impacts from prolonged higher rates, leading to high deposit costs. Also, the tough operating backdrop and volatile nature of the capital markets business are expected to make fee income growth challenging in the near term. Mounting operating expenses is another headwind.
Yet, the interest rate pressure that Bank of America faced last year has subsided to some extent, and risks surrounding deposit outflows have abated. The company’s ambitious expansion initiative to open financial centers in new and existing markets will drive further loan and deposit growth and help capitalize on cross-selling opportunities over the longer term.
BAC also continues to reward shareholders handsomely. As it cleared the 2024 stress test, the company intends to increase its quarterly dividend by 8% to 26 cents per share, beginning in the third quarter of 2024. In the last five years, it increased dividends four times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
Conclusion
The resurgence of IB business, high rates and decent loan demand paint a positive picture for BAC ahead of second-quarter earnings. Nonetheless, concerns over elevated expenses and deteriorating credit quality warrant caution for potential investors.
As the BAC stock is currently trading at almost a two-year high, it reflects investors’ highly bullish expectations from the second-quarter results. There is a fair chance of near-term volatility as the markets interpret and incorporate updates. Further, the company’s stretched valuation warrants a pause.
While Bank of America's prospects remain promising as the banking industry regains momentum, investors should not rush to buy the stock. Those interested in adding it to their portfolios might be better off waiting until after the release of quarterly numbers for clarity and a potentially attractive entry point.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the longer term.