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Will BofA (BAC) Q3 Earnings Succumb to Revenue Pressure?

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Bank of America Corp.BAC is slated to release third-quarter 2015 results on Oct 14, before the opening bell.

Last quarter, driven by lower expenses, rise in revenues and absence of substantial legal costs, BofA's results marked a year-over-year improvement. Further, the bottom line was well ahead of the Zacks Consensus Estimate.

Will BofA be able to sustain its profitability? Or will it disappoint this time? Let us see how things have turned up prior to this announcement.

Factors to Impact Q3 Results

Similar to the prior quarter, BofA is projected to witness a continued slump in trading revenues. Notably, Chief Executive and Chairman Brian Moynihan had forecasted a 5-6% fall in trading revenues for the quarter. While revenues from bonds, currencies and commodities trading are anticipated to decline, increased revenues in equities trading group will likely offset the downfall to some extent.

Further, as per data compiled by Thomson Reuters, due to equity market turmoil across the world, firms across the globe raised just $141 billion ($219 billion in the prior-year quarter) through IPOs and secondary equity offerings during the quarter. As a result, this quarter marks the worst since the second quarter of 2012. Hence, this is predicted to hurt BofA's equity underwriting fees too.

Also, at the same time, owing to a still low rate environment, a rise in BofA's interest income should remain constricted in the quarter. Further, provision for loan losses are expected to trend higher, owing to exposure in energy lending and lower level of reserve releases. Therefore, net revenue will remain muted, though there will be some bright spots as well.

We believe that driven by a rise in refinancing activities and increase in demand for home loans, mortgage banking income should trend upward. Moreover, according to data released by Thomson Reuters, the quarter was the best in terms of closed deals since the 2008 crisis. So, advisory fee revenue at BofA will witness steady growth, attributable to continued strength in M&A during the quarter.

Apart from this, BofA is projected to record almost negligible legal charges in the quarter compared with huge legal expenses incurred a year ago. Further, with no major litigation issues in the sight, we do not expect the company to take any additional legal reserve during the quarter.

Additionally, BofA's cost-saving initiatives will continue to support its bottom line. Overall, in absence of additional legal costs, we believe operating expenses will trend lower in the quarter driven by success of its cost-savings plan - Project New BAC.

Nevertheless, BofA's activities during the quarter were inadequate to win analysts' confidence. Hence, the Zacks Consensus Estimate fell 5.7% to 33 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively indicate that BofA is likely to beat the Zacks Consensus Estimate in the upcoming release. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: The Earnings ESP for BofA is -3.03%. This is because the Most Accurate estimate of 32 cents per share stands below Zacks Consensus Estimate of 33 cents.

Zacks Rank: BofA's Zacks Rank #3 increases the predictive power of ESP, but we need to have a positive ESP as well for a positive surprise.

Stocks to Consider

Here are a few major banking stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

The PNC Financial Services Group, Inc. PNC has an Earnings ESP of +1.12% and a Zacks Rank #3. The company will announce results on Oct 14.

The Earnings ESP for SunTrust Banks, Inc. STI is +1.21% and it carries a Zacks Rank #3. The company is slated to release results on Oct 16.

Capital One Financial Corporation COF has an Earnings ESP of +0.52% and a Zacks Rank #3. It is scheduled to report on Oct 22.

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PNC FINL SVC CP (PNC): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

SUNTRUST BKS (STI): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

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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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