Bank of America (NYSE: BAC) is scheduled to report its fiscal Q3 2021 results on Thursday, October 14. We expect Bank of America to top the consensus estimates for revenues, while the earnings are likely to remain below the expected figure. The bank posted mixed results in the last quarter, with the revenues missing the mark. It reported a 5% y-o-y decrease in its top line, mainly driven by a lower net interest income (NII) due to interest rate headwinds, coupled with negative growth in sales & trading revenues. The drop was partially offset by higher revenues from investment and brokerage services, card income, and service charges. That said, the firm’s net income received a big boost in Q2, primarily due to a significant reduction in provisions for credit losses. We expect the same trend to continue in the third quarter, as well.
Our forecast indicates that Bank of America’s valuation is $44 per share, which is at the same level as the current market price of around $44. Our interactive dashboard analysis on Bank of America’s Earnings Preview has more details.
(1) Revenues expected to beat the consensus estimates
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Bank of America’s revenues for full-year 2020 was $85.5 billion – down 6% y-o-y, mainly driven by lower net interest income (NII), partially offset by growth in sales & trading and investment banking revenues.
- The company witnessed an 11% y-o-y drop in the NII to $43.4 billion in 2020 due to interest rate headwinds and a lower new loan issuance rate. The NII contributes more than 50% of the total revenues hence it has a significant impact on its top-line. It continued its negative trajectory in the first and second quarter of 2021, decreasing by 16% and 5% on a year-on-year basis respectively. While we expect the outstanding loans to see some improvement in the subsequent quarters, a lower interest rate environment is unlikely to see an immediate recovery, hurting the NII.
- The bank benefited from growth in sales & trading (up 19%) and investment banking (up 27%) revenues in 2020 due to higher trading and underwriting deal volumes. The same trend was observed in the first quarter of 2021. However, sales & trading revenues decreased 14% y-o-y in the second quarter due to lower FICC (fixed income, currency, and commodity) trading revenues, partially offset by growth in the equity trading sub-segment. Further, investment banking revenues, which saw a major jump in Q1 due to higher equity underwriting deals, were around the same level as the year-ago period. We expect the investment banking and sales & trading revenues to normalize over the subsequent quarters.
- The wealth management segment decreased 5% y-o-y to $18.6 billion in 2020. It was mainly due to lower net interest yield on wealth management loans and a slight drop in fees as a % of total client balance, partially offset by an increase in the average loans and total client balance. While the revenues were at par with the year-ago period in Q1, it witnessed a 14% y-o-y growth in the second quarter. This growth was mainly due to growth in total client balances to $3.65 trillion – 9% more than the level seen at the end of December 31st. We expect the same trend to continue in the subsequent quarters.
- Overall, we expect Bank of America’s revenues to remain around $88.4 billion for FY2021.
Trefis estimates Bank of America’s fiscal Q3 2021 revenues to be around $22.05 billion, marginally above the $21.78 billion consensus estimate. We expect the growth in wealth management, card income, and service charges to drive the third-quarter results.
Going forward, we expect Bank of America’s NII to suffer for some more time. Further, the sales & trading and investment banking businesses are likely to normalize with recovery in the economy. That said, the wealth management unit is likely to drive growth for the company, coupled with non-interest income from the core banking segments. Our dashboard on Bank of America’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
Bank of America Q3 2021 adjusted earnings per share (EPS) is expected to be $0.64 per Trefis analysis, almost 10% below the consensus estimate of $0.71. The profitability numbers suffered in 2020 due to higher provisions for credit losses – adjusted net income was down 37% y-o-y to $16.5 billion. However, the firm reduced the provisions in the first quarter of 2021 due to an improvement in the loan repayment capability of its customers, leading to a more than 100% increase in the profitability numbers. The same pattern was evident in the second quarter, with the adjusted net income increasing 173% to almost $9 billion. This was due to an improvement in provisions for credit losses from $5.1 billion to -$1.6 billion, and a positive income tax adjustment related to the revaluation of U.K. net deferred tax assets. We expect the provisions to further be reduced in the third quarter.
Moving forward, we expect BAC’s net income margin figure to recover in FY2021 due to a favorable decrease in provisions for credit losses. It is likely to result in an adjusted net income figure of $22.9 billion – up 39% y-o-y. This will enable the bank to report an EPS of $2.73.
(3) Stock price estimate largely around current market price
We arrive at Bank of America’s valuation, using an EPS estimate of around $2.73 and a P/E multiple of just above 16x in fiscal 2021. This translates into a price of $44, which is at the same level as the current market price of close to $44.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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