Bank of America (BA)C is expected to have recorded decent trading performance in the first quarter of 2021. Similar to 2020, the quarter witnessed a significant rise in market volatility driven by the $1.9-trillion stimulus package, falling coronavirus infection rate, rise in vaccination coverage, concerns over inflation and expectations of faster-than-expected economic rebound. Thus, the company’s trading revenues are expected to be one of the factors supporting its results, scheduled to be announced on Apr 15, before market open.
Like the past couple of quarters, all major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the first quarter, with both the S&P 500 and Dow Jones touching new highs. The performance of tech-heavy Nasdaq was not that impressive owing to investors rotating into cyclical sectors. Along with impressive equity markets performance, fixed income trading remained strong, driven by the Federal Reserve’s bond-buying program. Hence, (BofA)’s equity and fixed-income trading revenues are expected to have improved.
The Zacks Consensus Estimate for equity trading revenues of $1.73 billion suggests an increase of 2.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.81 billion indicates a fall of 4.7%. The consensus estimate for total trading revenues is pegged at $4.54 billion, suggesting a decline of 2%.
Other Key Factors
Investment Banking (IB) Fees: Similar to second-half 2020, deal making continued at a faster pace in first-quarter 2021 on the back of gradual global roll-out of COVID-19 vaccines, a brighter macroeconomic outlook and lower interest rates. Though the deal volume didn’t show much improvement, the total value of pending/completed transactions rose drastically. Hence, (BofA)’s advisory fees are likely to have been positively impacted.
Continuing with the momentum that started in the second half of last year, the IPO market remained active in the to-be-reported quarter. Also, as companies kept building liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances.
Further, amid near-zero interest rates and the Federal Reserve’s steady bond purchase program (that began in March 2020), bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. So, 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 first quarter.
(BofA)’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $4.81 billion indicates a rise of 4.7% from the prior-year level.
Net Interest Income (NII): Similar to 2020, demand for loan remained soft during the first quarter of 2021, while commercial real estate loan and consumer loan (except credit cards) portfolios offered some support. The primary reason for low demand for loans continues to be the slow resumption of business activities.
This, along with the low interest rate environment, is likely to have hurt (BofA)’s net interest yield and NII in the quarter, while steepening of the yield curve (the difference between short and long-term interest rates) might have offered some support.
Expenses: 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 first quarter.
Management expects first-quarter 2021 expenses to include nearly $350 million for seasonally elevated personnel cost. Also, the company will incur a $400 million expense in the quarter to account for a change in bonus policies.
Asset Quality: Significant reserves that were built last year owing to deterioration in the macroeconomic backdrop are likely to have been released by (BofA) (similar to the second half of 2020) in first-quarter 2021, with support from stimulus packages and gradual improvement in economic conditions.
Management expects increase in later stage delinquencies to lead to a slight rise in card net charge-offs.
The Zacks Consensus Estimate for non-performing assets is pegged at $5.12 billion for the to-be-reported quarter, which indicates a rise of 18.1% from the prior-year quarter’s reported figure. Likewise, the consensus estimate for non-performing loans of $4.95 billion suggests a 22.1% rise.
What the Zacks Model Unveils
Our proven model shows that (BofA) has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat this time around.
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 +0.49%.
Zacks Rank: The company currently carries a Zacks Rank of 3.
Bank of America Corporation price and EPS Surprise
The Zacks Consensus Estimate for earnings is pegged at 65 cents, which has witnessed an upward revision of 3.2% over the past seven days. The estimated figure reflects growth of 62.5% from the year-ago reported number.
However, the consensus estimate for sales of $21.74 billion indicates a 4.5% decline.
Other Big Banks That Warrant a Look
Here are other big bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:
The Earnings ESP for Wells Fargo WFC is +5.32% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Apr 14.
JPMorgan JPM is slated to report quarterly earnings on Apr 14. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.33%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Citigroup C is slated to report quarterly results on Apr 15. The company has an Earnings ESP of +4.48% and currently carries a Zacks Rank of 3.
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