Trading, Underwriting Businesses to Aid BofA (BAC) Q2 Earnings

A persistent rise in market volatility on account of the coronavirus pandemic was seen during second-quarter 2020. With a spike in volatility and higher client activities, Bank of America’s BAC trading business is likely to have got a significant boost. Trading revenues, thus, are likely to be a major supporting factor for its upcoming results, slated to release on Jul 16, before market open.

Similar to the first quarter, the coronavirus pandemic and concerns surrounding its impact on the economy weighed on investor sentiments. Thus, investors kept moving toward safe havens like Treasury bonds and other commodities like gold. So, BofA’s equity and fixed income market revenues are expected to have improved in the to-be-reported quarter.

At an investor conference in May, CEO Brian Moynihan said that the company's trading desks continued to do well in the second quarter, though the pace is not the same as first-quarter 2020. The bank expects trading revenues for the to-be-reported quarter to rise in “high-single digits” or nearly 10% year over year. He added, “You’ve seen the volatility come down in the market, and so equities is down and FICC is up a lot.”

Thus, trading revenues are likely to have been robust in the to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.24 billion suggests an increase of 8.5% from the prior-year quarter. The consensus estimate for fixed income trading revenues indicates a year-over-year rise of 10.3% to $2.31 billion.

Thus, the consensus estimate for trading revenues indicates a rise of 9.6% year over year to $3.56 billion.

Here are a few other major factors that are likely to impact BofA’s second-quarter results:

Muted Growth in Investment Banking (IB) Fees: Deal making went for a toss in second-quarter 2020 as the coronavirus pandemic persistently wreaked havoc, and the economy and business activities came to a grinding halt. Global M&As plunged to the lowest level in more than a decade. Thus, BofA’s advisory fees are likely to have been adversely impacted.

Further, IPO activities declined before picking up a bit in the last weeks of June. Yet, there was a substantial rise in follow-up equity issuances as companies tried to build liquidity to tide over the pandemic crisis.

Also, amid near-zero interest rates and the Federal Reserve’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, growth in BofA’s equity underwriting and debt origination fees (accounting for almost 40% of total IB fees) is expected to have been robust in the second quarter.

Management expects IB revenues to rise about 10% in the second quarter. Specifically, the bank is likely to have benefited from secondary share issues, while M&As are expected to be down year over year.

BofA’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.46 billion suggests a 10.4% decline from the prior-year level.

Decline in Net Interest Income (NII): The overall lending scenario remained decent during the second quarter, with commercial and industrial, along with real estate loan portfolios having offered substantial support. Conversely, as consumer sentiments dipped amid virus concerns, the demand for consumer loans was hit hard.

With the Federal Reserve cutting interest rates to near zero in March for supporting the U.S. economy, BofA’s net interest yield and NII are likely to have been adversely impacted.

Given the adverse impact of the coronavirus pandemic on the economy and lower interest rates, management expects NII to be around $11 billion in the second quarter, indicating a 9.8% year-over-year decline.

Expenses to be Manageable: 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 second quarter.

Asset Quality to Deteriorate: As BofA is likely to have built additional loan loss reserves owing to the worsening macro-economic backdrop, provisions are expected to have risen substantially in the second quarter.

Also, the consensus estimate for non-performing assets is pegged at $4.62 billion for the to-be-reported quarter, which indicates a 3.8% increase from the prior-year quarter.

Here is what our quantitative model predicts:

Our proven model doesn’t conclusively predict an earnings beat for BofA this time around. The stock doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better.

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 0.00%.

Zacks Rank: BofA currently carries a Zacks Rank 3.

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

The Zacks Consensus Estimate for earnings of 32 cents suggests a 56.8% plunge from the year-ago reported number. Also, the consensus estimate for sales of $21.7 billion indicates 5.8% fall from the year-ago quarter.

Banks That Warrant a Look

Here are a few 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:

PNC Financial PNC is slated to release quarterly results on Jul 15. The company has an Earnings ESP of +37.7% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BNY Mellon BK is +0.46% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Jul 15.

Truist Financial Corporation TFC is set to report quarterly earnings on Jul 16. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +8.32%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

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