Weak Credit and Normalized Trading Will Damage BofA (BAC) Second Quarter Profits

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Bank of America BAC is expected to have weak trading performance in the second quarter of 2021. Unlike the previous five quarters, when significant market volatility and customer activity supported trading earnings, market normalization and lower volatility are expected to decrease this time around. Thus, the company’s sales revenue is unlikely to provide significant support for its upcoming results, which are due to be announced on July 14, before the market opens.

As in the past few quarters, all of the major indices – the S&P 500, Dow Jones and Nasdaq – surged in the second quarter and reached new highs. However, low volatility may have had some impact on capital volumes. The Federal Reserve’s bond buying program likely supported fixed income trading volumes. As such, BofA’s revenue from equity and fixed income trading is expected to be decent during the quarter.

The Zacks consensus estimate of $ 1.49 billion in equity trading revenue implies a 23.5% increase over the prior quarter’s reported figure. The consensus forecast for fixed-income trading revenue of $ 2.44 billion shows a 17.1% drop. The consensus forecast for total trading revenue is $ 3.93 billion, down 5.3%.

Other key factors

Net Interest Income (NII): Continuing the trend of the past few quarters, loan demand (mostly commercial and industrial and residential loans according to the Fed) remained weak in the second quarter of 2021, while commercial and consumer loan portfolios provided some support.

This, along with low interest rates, probably hurt the net interest yield and net interest rate of the BofA for the quarter, while the moderate rise in the yield curve (the difference between short-term and long-term interest rates) could give some breathing room.

Investment bank (IB) fees: As in the previous few quarters, deals continued at a faster pace in the second quarter of 2021 as both deal volume and value grew significantly. This was primarily driven by strong macroeconomic expectations proposed by President Joe Biden for tax hikes, cash reserves and low interest rates. As such, BofA’s consulting fees are likely to be positively impacted.

The continued dynamics of the IPO market and the steady rise in subsequent share issues are likely to support share underwriting fees in the quarter. The bond issue volumes were also modest. As such, BofA’s share underwriting and leveraged commissions (accounting for nearly 40% of IB’s total commissions) are expected to grow decently in the second quarter.

IB BofA’s revenue is accounted for in the Global Banking segment. The Zacks consensus estimate for segment net revenue of $ 4.47 billion indicates a 12.3% decline from a year ago.

Expenses: While the bank continues to digitize operations, modernize technology, and expand into new markets by opening branches, leading to higher associated costs, its previous efforts to improve operational efficiency likely led to manageable levels of spending in the second quarter.

Management expects operating expenses in the second quarter of 2021 to decline on a consistent basis to around $ 14 billion.

Asset quality: Continuing the trend of the last three quarters and thanks to the improved macroeconomic background and stable credit market conditions, BofA is likely to release reserves in the second quarter. This could support the company’s earnings in the reporting quarter.

Management expects net write-offs to decline consistently, given the positive trends in arrears.

The Zacks consensus estimate for non-performing assets is fixed at $ 5.35 billion for the reporting quarter, up 16.1% from the prior year’s reported figure. The consensus forecast for non-performing loans of $ 5.21 billion shows an increase of 18.7%.

What the Sachs model represents

Our proven model shows that BofA has the right combination of two key ingredients – positive ESP for earnings and Zacks Rank # 3 (Hold) or better – to increase your chances of winning this time around.

You can find the best stocks to buy or sell before being reported using our ESP earnings filter.

ESP Earnings: ESP profit for BofA is + 0.65%.

Rank Sachs: The company is currently rated Zacks 3.

Bank of America Corporation Price and Earnings Per Share Surprise

Bank of America corporation price and earnings per share surprise

Bank of America corporation price and earnings per share surprise

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

The Zacks consensus forecast for earnings is pegged at 77 cents, indicating an upward revision of 2.7% over the past seven days. The estimated figure reflects an increase of 108.1% over the previous year.

However, the consensus forecast for sales of $ 21.85 billion indicates a decline of 2.1%.

Other banks worthy of attention

Here are a few other banking stocks you might want to consider, as our model shows that they too have the right combination of elements to outperform profits this time:

Earning ESP for First Republican Bank FRC is + 1.47% and currently has a Zacks rating of 3. The company plans to submit quarterly reports on July 13th.

PNC Financial PNC plans to report quarterly results on July 14th. The company has an ESP of + 6.14% and currently has a Zacks rating of 3. You can see the full list of today’s Zacks # 1 stocks (strong buy) here

USA Bancorp USB plans to announce quarterly results on July 15th. The company has an ESP of + 0.49% and currently has a Zacks rating of 3.

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Bank of America Corporation (BAC): Free Stock Analysis Report

The PNC Financial Services Group, Inc (PNC): Free Stock Analysis Report

US Bancorp (USB): Free Stock Analysis Report

First Republic Bank (FRC): Free Stock Analysis Report

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