BofA (BAC) Q2 Earnings: Is The Stock Likely To Disappoint?

Bank of America Corp. (NYSE:BAC) is slated to release second-quarter 2016 results on Monday, Jul 18, before the opening bell. However, of late the company’s earnings estimates have been witnessing a downward trend. So, does this indicate a disappointing performance from the company in the upcoming release?

Last quarter, lower trading revenues, investment banking fees and mortgage banking revenue as well as a rise in credit costs hurt BofA’s results. However, these were partially offset by expense control, absence of legal costs and higher card fees.

Nonetheless, BofA has a decent surprise history, as evident from the chart below:

BANK OF AMER CP Price and EPS Surprise

BANK OF AMER CP Price and EPS Surprise | BANK OF AMER CP Quote

Earnings Whispers

Before going into the details about the factors that will influence the results, let’s check what our quantitative model predicts.

Our quantitative model does not predict an earnings beat. Here is what it indicates:

Chances of BofA beating the Zacks Consensus Estimate in the second quarter are quite low. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

Zacks ESP: The Earnings ESP for BofA is -2.94%. This is because the Most Accurate Estimate of 33 cents is below the Zacks Consensus Estimate of 34 cents.

Zacks Rank: BofA’s Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult.

Additionally, the estimate of 34 cents per share for the upcoming release indicates a year-over-year decline of about 24.22%.

Further, BofA’s activities during the quarter failed to win analysts’ confidence, as evident from eight downward revisions in earnings estimates (versus no upward revisions) over the last 30 days. Also, the Zacks Consensus Estimate fell 5.6% over the last 7 days.

Factors at Play

Weakness to Persist in Investment Banking Operation: Driven by concerns over regulatory and tax risks, increased market volatility and national security, global M&As declined during the second quarter. Further, global economic concerns led to the weakening of IPO market. These will dampen BofA’s advisory and investment banking revenues.

Net Interest Margin Under Persistent Strain: As the Fed did not increase the interest rates this year, BofA should continue facing margin compression. Notably, net interest margin for the company had declined in the first quarter too. We believe that this trend is likely to continue during the second quarter as well.

Exposure to Energy Sector Loans to Hurt Credit Quality: Given the significant exposure in energy-sector lending (4.6% of total commercial credit exposure as of Mar 31, 2016), BofA will likely witness a rise in provision for loan losses in the quarter. Moreover, the company expects net charge-offs within $800–$900 million range in the quarter, while overall reserve releases will be moderate.

Mortgage Operations to Improve: Lower mortgage rates should have given a boost to BofA’s mortgage revenues. Nonetheless, any substantial improvement in outstanding mortgage loans is unlikely as the volume of repayment and charge-off of mortgage loans was more than the fresh originations.

Trading Revenues on a Rebound: Over the last few quarters, BofA has been experiencing a slump in trading revenues. However, at an industry conference early in June, the company CEO Brian Moynihan stated that second-quarter trading revenue is on track for “mid-single digits” growth from the year-ago period.

Efficient Expense Control: In absence of additional legal costs and provisions, operating expenses should remain stable in the quarter, aided by success of its cost-savings plan – Project New BAC – and other restructuring initiatives. Management targets core expenses to be around $13 billion during the quarter.

Stocks to Consider

Here are a few finance stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated (NYSE:CMA) has an Earnings ESP of +1.47% and a Zacks Rank #3. It is scheduled to report results on Jul 19.

Regions Financial Corporation (NYSE:RF) has an Earnings ESP of +5.00% and a Zacks Rank #3. It is slated to report on Jul 19.

Federated Investors, Inc. (NYSE:FII) has an Earnings ESP of +2.13% and a Zacks Rank #3. It is slated to report results on Jul 28.