Bank of America (BAC), the second largest US lender, will report its first quarter earnings on April 16. With the bank’s net interest income expected to decline in the first quarter, should investors consider investing in the stock ahead of its earnings? Read on to know my point of view.
Bank of America Corporation (BAC) will announce first quarter results on April 16. Wall Street expects a year-over-year decline in the bank’s earnings and revenue. In this article I discussed why waiting for an appropriate entry point in the stock might be wise.
For the first quarter, BAC’s EPS and revenue are expected to decline 17.6% and 3.3% year over year, to $0.77 billion and $25.39 billion, respectively. The company has a solid earnings history, beating the consensus estimate in three of the trailing four quarters.
For fiscal 2024, BAC expects loans to grow at a low to mid-single digit percentage rate. After the fourth quarter results, BAC CFO Alastair Borthwick said he expects net interest income to be $100 million to $200 million lower in the first quarter compared to the fourth quarter of 2023 and possibly weaken in the second quarter as that consumers pay taxes, before improving in the second half of the year.
The Charlotte, North Carolina-based bank’s net interest income is expected to hit the upper forecast range of $13.90 billion to $14 billion. Expenses are expected to be between $700 million and $800 million higher than in the fourth quarter of 2023. BAC shares have fallen 0.5% over the past month and gained 33.1% over the past six months .
Here’s what you might consider ahead of its next earnings release:
Mixed financials
BAC’s total revenue, net of interest expense, for the fiscal fourth quarter, ended December 31, 2023, fell 10.5% year-over-year to $21.96 billion. Its net income applicable to common shareholders fell 58.9% year over year to $7.27 billion. The company’s net interest income fell 5% from the year-ago quarter to $13.95 billion. Its EPS was $0.35, a decline of 58.8% year over year.
Additionally, its provision for credit losses increased 1.1% year-over-year to $1.10 billion. Additionally, its total net charge-offs increased 73% year-over-year. Net write-offs as a percentage of average loans and leases outstanding came in at 0.45%, compared to 0.26% in the prior-year quarter.
On the other hand, its CET1 ratio stood at 11.8%, compared to 11.2% in the year-ago quarter. Additionally, total loans and leasing increased 0.8% year-over-year to $1.05 trillion.
For the fiscal year ending December 31, 2023, BAC’s total revenue, net of interest expense, increased 3.8% year-over-year to $98.58 billion. Its net interest income increased 8.5% from the same period a year earlier to $56.93 billion.
On the other hand, BAC’s credit loss provisions increased 72.8% year-on-year to $4.39 billion. Its net income applicable to common shareholders fell 4.4% year over year to $24.87 billion. The company’s EPS was $3.08, down 3.4% year-over-year. Additionally, its total net charge-offs increased 74.9% year-over-year to $3.80 billion.
Favorable analysts’ estimates
Analysts expect BAC’s EPS and revenue for fiscal 2024 to increase 2% and 1.7% year over year, to $3.14 billion and $100.25 billion, respectively. Fiscal 2025 EPS and revenues are expected to grow 9% and 2.8% year over year, to $3.42 billion and $103.09 billion, respectively.
Mixed profitability
In terms of trailing 12-month net income margin, BAC’s 28.15% is 18.3% higher than the industry average of 23.80%.
On the other hand, BAC’s trailing 12-month return on total assets stands at 0.83% and is 23.4% lower than the industry average of 1.09%. Its trailing 12-month return on equity of 9.79% is 10.4% lower than the industry average of 10.93%.
Mixed rating
In terms of forward non-GAAP P/E, BAC’s 11.39x is 13.8% higher than the industry average of 10.01x. Its forward price/sales of 2.82x is 15.9% higher than the industry average of 2.43x.
On the other hand, its trailing 12-month P/B of 1.07x is 0.3% lower than the industry average of 1.08x.
POWR ratings reflect uncertainty
BAC has an overall rating of C, equivalent to Neutral in our POWR rating system. POWR ratings are calculated by considering 118 different factors, each optimally weighted.
Our proprietary rating system also evaluates each security based on eight distinct categories. BAC has a C quality grade, consistent with its mixed profitability. Its beta of 1.39 justifies its C grade of stability.
It has a C grade for Value, which is in keeping with its mixed rating.
BAC is ranked #1 out of 9 stocks in the Money Center Banks industry. Click here to access BAC’s growth, momentum and sentiment ratings.
Bottom line
Wall Street expects BAC’s first-quarter EPS and revenue to decline year over year. Despite high interest rates, the bank’s net interest margin (NII) is expected to remain compressed in the first quarter, with net interest margin likely to decline for the fourth time in five quarters. Furthermore, an inverted yield curve means that BAC is forced to suffer higher unrealized losses due to its low-yielding, long-dated securities.
Despite NII’s weakness, the bank is expected to have posted substantial gains in trading and investment banking due to improved capital markets activity. With sticky inflation, the Federal Reserve is unlikely to cut interest rates in June, meaning interest rates will stay higher for longer. While this means banks can charge higher rates on loans, they will also have to pay more for deposits, which could hit their margins.
Given BAC’s mixed financials, valuation and profitability, it may be wise to wait for a better entry point into the stock.
How does Does Bank of America Corporation (BAC) compare to its peers?
BAC has an overall POWR rating of C, equivalent to a Neutral rating. You can take a look at these A- and B-rated stocks in the Foreign Banks sector: Banco Macro SA (BMA), Banco Santander, SA (SAN), and Banco Bilbao Vizcaya Argentaria, SA (BBVA). To explore more foreign bank stocks with buy ratings, click here.
What to do next?
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BAC shares rose $0.17 (+0.47%) in premarket trading on Monday. Year to date, BAC has gained 7.05%, compared to a 7.81% gain in the benchmark S&P 500 index over the same period.
About the author: Dipanjan Banchur
Ever since he was in primary school, Dipanjan was interested in the stock market. This led him to earn a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Moreover…
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