by Clement Thibault
1. Revenue and Earnings forecasts
Bank of America's (NYSE:BAC) forecast for Q2 is $21.02B for revenue and $0.33 for EPS. This means analysts are expecting about a 10% drop in earnings from Q2 of last year. Q1 2016's earnings drop was harsher. Earnings per share dropped 33%, from $0.30 to $0.20, against expectations of $0.21. Meeting expectations for Q2 would mean the bank's EPS is down about 20% year-over-year for the first half of 2016. While most banks have recently struggled withe earnings, BofA's drop of 20% in profitability doesn't compare well to other major banks. JPMorgan (NYSE:JPM) is down just 6% for the same period and Wells Fargo (NYSE:WFC) is down just 3% Y-o-Y for the first half of 2016
2. Bank of America beats revenue expectations, but not earnings
Bank of America's revenues have beaten expectations during every quarter over the past two years, by as much as 16% in Q2 2015. The earnings story, however, has been less steller. BofA has failed to perform according to expectations in five of the past six quarters, with the lone exception being—unsurprisingly—Q2 2015. Will we see this pattern play out yet again?
3. Loan growth could be the key
The second quarter's lending growth has been better than expected, coming in at 7.2% versus a 5.2% average over the past 25 years, according to the WSJ. Industry-wide, bank margins are still thin due to the Fed's decision to delay the next rate hike, but more loan volume should provide additional revenue and a bit of breathing room for banks.
4. But bad oil loans could weigh on earnings
At the end of Q1, of all US banks, BofA had the greatest exposure to the still-struggling energy sector, with $21.3B in utilized credit. On top of that, it has $22.6B of unused credit allocated to the energy sector, which raises its total potential exposure to $43.8B. This brings BofA in right behind Citigroup's (NYSE:C) $58B of potential exposure. It stands to reason therefore that Q1 2016 was the first quarter during which loan loss reserves for US banks grew since Q1 2010. Bank of America has close to one billion set aside right now.
5. Brexit clearly hurt the stock price; Will it now affect earnings?
The U.K's decision to leave the European Union sent shockwaves coursing through the financial world. BofA absorbed some of them, losing 13% over the two days following the referendum. The stock still hasn’t fully recovered. The volatility could hurt the bank's investments unit, as almost all asset prices took a hit. This would be similar to Q1 concerns about economic growth in China which caused major banks' trading revenues to decline.
Conclusion
Bank of America reports tomorrow, Monday, a few days after most major banks. Though JPMorgan had a strong start on Thursday, beating expectations and earnings, results have been mixed for the rest of the sector. Citigroup beat earnings but not revenue expectations, US Bancorp (NYSE:USB) did the exact opposite, and Wells Fargo was on par for earnings, but below on revenue.
We will likely see more of the same from Bank of America, with previously instituted cost cutting moves likely to pay off on the bottom line, but not when it comes to revenue growth. In any case, missing the mark on earnings or lowering the forecast for the rest of the year after Wall Street has already done so will disappoint investor and send the stock back down.
Polling 31 analysts, opinions on the stock are extremely lopsided: 25 buy ratings and 6 neutrals. There's a good reason for that. Bank of America trades at just 58% of its book value, and it's not in any excessive liquidity or solvency danger.
Of course, the profitability of the entire financial sector could remain flat in the coming quarters because of oil prices and geopolitical twists, but the expectation is that when the dust finally settles, at the very least banks will return to trading at book value (if not better). A rate hike would be a good place from which the financial sector recovery might start. BofA expects a 1% increase in short term interest to boost its yearly interest income by as much as $6B. That would be more than 50% above Q1's $11.6B figure.