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Can Improved Investment Banking Aid BofA (BAC) Q4 Earnings?

Performance of investment banking (IB), one of the key sources of revenues for Bank of America BAC, is likely to have been decent in fourth-quarter 2019. So, this will to some extent aid the bank’s results, slated on Jan 15.

IB income basically comprises advisory fees (generated from M&A deals and IPOs) and underwriting revenues (equity and debt issuances). So, let’s check how these are likely to have been in the to-be-reported quarter.

Low interest rates and gradual easing of geopolitical concerns are expected to have offered support to IB fees. Though the number of closed deals declined during the fourth quarter, a higher number of announced M&As indicate a strong pipeline.

Global deal value declined as well. This likely had an adverse impact on BofA’s advisory fees. However, as the bank is one of the leading players in this space and has higher focus on M&A business, this must have provided some leverage.

Now coming to underwriting fees, solid equity market performance and the central banks’ accommodative stance are likely to have driven corporates to issue equities globally. Similarly, IPO activities witnessed an uptrend during the to-be-reported quarter.

Also, bond issuance volumes were solid, while debt issuances were muted as corporate loan demand was weak. Therefore, growth in BofA’s equity underwriting fees and debt origination fees (accounting for nearly 40% of total IB fees) is likely to have been decent in the fourth quarter.

At the investors' conference in December 2019, CEO Brian Moynihan had projected IB revenues to rise 3-4% on a year-over-year basis.

BofA’s IB revenues are accounted in the Global Banking segment. The Zacks Consensus Estimate for the segment’s net revenues of $5.05 billion suggests a slight decline from the year-ago reported figure.

Earnings & Revenue Expectations

For BofA, the Zacks Consensus Estimate for earnings of 68 cents suggests a 2.9% decrease from the year-ago reported number. Also, the consensus estimate for sales of $22 billion indicates a fall of 3.2%.

Bank of America Corporation Price and EPS Surprise

 

Bank of America Corporation Price and EPS Surprise

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


Click here to know about a few other factors that are likely to have impacted BofA’s earnings.

Our Take

Amid lower interest rates and soft corporate lending, decent IB performance is likely to have had a positive effect on BofA’s top-line growth. Along with this, solid trading performance will offer some support to this Zacks Rank #2 (Buy) stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

IB Fee Projections for Other Banks

During an investor conference in December, JPMorgan’s JPM CFO, Jennifer Piepszak, projected IB revenues to be flat on a year-over-year basis. Further, she had noted, “The quarter has played out a little bit better than we thought largely on healthy investment grade flow given the rate environment. Important to note there that the wallet is shrinking.”

At the same conference, Citigroup’s C CFO Mark Mason projected IB revenues to be flat to slightly down from the prior-year quarter. He had, further, stated “We expect to continue to take share,” though wallets are declining.

Similar to the above-mentioned banks, IB revenues form a large portion of total revenues for Goldman Sachs and Morgan Stanley MS. Hence, improved IB performance is expected to have aided these banks’ revenues and earnings in the fourth quarter.

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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.

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