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Bear of the Day: Bank of America (BAC)

Big banks continue to face a challenging environment. Stricter regulations have hurt their investment banking and trading businesses and persistently low interest rates continue to impact profitability. Bank of America ( BAC ) reported a 13% decline in its first quarter profit, missing the Zacks Consensus Estimate and sending the stock to a Zacks Rank #5 (Strong Sell).

About the Company

Headquartered in Charlotte, NC, Bank of America is the second largest bank in the US by assets behind J.P. Morgan. Its banking and non-banking subsidiaries provide a diverse range of banking and non-banking financial services and products.

Disappointing First Quarter Results

BofA reported its first quarter results on April 14. Net earnings of $0.21 per share lagged the Zacks Consensus Estimate of $0.21 and were down from $0.25 recorded in the same quarter a year ago.

The bank reported revenues $19.5 billion, missing the Zacks Consensus Estimate of $20.5 billion and down 7% year-over-year. Lower revenue was the main reason behind the earnings miss. Three of the bank's four main operating segments reported revenue declines.

The bank said low interested rates were partly responsible for revenue and earnings misses. Trading revenues fell about 16% year-over-year as volatility and uncertainty prevailing in financial markets impacted trading. The positive news was they were able to cut their expenses by 6%.

BofA increased its reserves for energy loan losses by an additional $525 million to about $1 billion, or about 4.6% of its energy loans.

Falling Estimates

After lackluster results, analysts have revised their estimates for the company sharply downwards. Zacks Consensus Estimates for the current and the next fiscal year are now $1.34 per share and $1.60 per share, down from $1.43 and $1.65 respectively before the results.

The Bottom Line

After strict regulatory norms imposed on big banks, they have been finding it difficult to generate profits in their investment banking and trading businesses. Rising market volatility has also impacted their traditional businesses. Further continued low interest rates have hurt their lending profitability.

In addition to Zacks Rank #5, the stock has a poor VGM score of "D" and Zacks Industry Rank of 204 out of 265 (Bottom 23%). It would be safer for investors to avoid this stock until the outlook for big banks improves.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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