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Bank of America (BAC) Pre-Earnings Buy or Sell?

America’s second-largest bank by assets, Bank of America (BAC), will release its fourth-quarter earnings on January 12. The bank is expected to report year-over-year declines in revenue and earnings. With the Federal Reserve indicating three rate cuts this year, is BAC worth buying now? Read on to learn my view…

Bank of America Corporation (BAC) is scheduled to report its fourth-quarter results on January 12. Wall Street anticipates that the bank will report decreases in both revenue and earnings compared to the year-ago quarter. Investors are eagerly awaiting insights into how the bank managed the challenges posed by the 22-year high interest rates in the last quarter.

In this piece, I have discussed why waiting for an opportune entry point in the stock could be wise.

For the fourth quarter, BAC’s EPS and revenue are expected to decline 21.3% and 2.3% year-over-year to $3.51 and $23.98 billion, respectively. However, the company has a solid earnings history, having beaten the consensus estimate in each of the trailing four quarters.

The bank’s net interest income will likely contract in the fourth quarter. Consensus estimates for BAC’s net interest income in the fourth quarter stood at $13.96 billion, compared to $14.68 billion reported in the prior-year quarter.

During the fourth quarter, BAC will recognize a $1.6 billion charge. In a filing with the Securities and Exchange Commission (SEC), the company said the net non-cash pretax charge was booked in the fourth quarter of 2023 and presented in revenue through market making and similar activities.

The charge was booked because of the permanent shutdown of the Bloomberg Short-Term Bank Yield Index on November 15. The Bloomberg Short-Term Bank Yield Index was created as an alternative benchmark rate to the London Interbank Offered Rate (LIBOR).

As a result of the shutdown of the BSBY index, BAC determined that it was required “to ‘de-designate’ certain interest rate swaps used in cash flow hedges” as of November 2023 and “reclassify into earnings any amounts recognized in the accumulated other comprehensive income category of shareholders’ equity that relate to forecasted cash flows that are now no longer expected to occur.”

The charge will reduce the bank’s common equity tier 1 ratio by eight basis points as of the end of 2023. Piper Sandler & Co. analyst Scott Siefers said, “This strikes us as a one-time accounting charge that will affect only reported earnings and have just a minimal impact on capital.” The charge of $1.6 billion is expected to be recognized in the BAC’s interest income through 2026.

BAC’s stock has gained 31% over the past three months and declined 0.7% over the past year to close the last trading session at $34.16.

Here’s what could influence BAC’s performance in the upcoming months.

Robust Financials

For the third quarter, which ended September 30, 2023, BAC’s total revenue, net of interest expense, increased 2.7% year-over-year to $25.17 billion. Its net income applicable to common stockholders rose 10.5% year-over-year to $7.27 billion.

Additionally, its EPS came in at $0.90, representing an increase of 11.1% year-over-year. Also, its net interest income rose 4.5% over the prior-year quarter to $14.38 billion. In addition, its CET1 ratio came in at 11.9%, compared to 11% in the year-ago quarter.

Mixed Analyst Estimates

Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 6.4% and 6.1% year-over-year to $3.39 and $100.74 billion, respectively. On the other hand, its EPS for fiscal 2024 is expected to decline 4% year-over-year to $3.26. Its revenue for fiscal 2024 is expected to increase 0.3% year-over-year to $101.05 billion, respectively.

Mixed Profitability

In terms of the trailing-12-month net income margin, BAC’s 31.52% is 24.5% higher than the 25.31% industry average. On the other hand, BAC’s 0.97% trailing-12-month Return on Total Assets is 16.5% lower than the 1.16% industry average. Its 11.59% trailing-12-month Return on Common Equity is 0.8% lower than the 11.69% industry average.

Discounted Valuation

In terms of forward non-GAAP P/E, BAC’s 10.07x is 4.3% lower than the 10.52x industry average. Its 1.03x forward Price/Book is 13.7% lower than the 1.19x industry average. On the other hand, its 2.68x forward Price/Sales is marginally lower than the 2.68x industry average.

POWR Ratings Reflect Uncertainty

BAC has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BAC has a C grade for Quality, consistent with its mixed profitability. Its 1.42 beta justifies its C grade for Stability.

It has a C grade for Sentiment, in sync with its mixed analyst estimates.

BAC is ranked #2 out of 9 stocks in the Money Center Banks industry. Click here to access BAC’s Growth, Value, and Momentum ratings.

Bottom Line

BAC’s fourth-quarter revenue and EPS are expected to decline year-over-year. Apart from a decline in its net interest income, its profitability is expected to take a hit due to non-performing loans and the rise in the cost of deposits. The bank will take a $1.6 billion charge in the fourth quarter, which will lead to an eight basis points decline in its CET1 ratio.

Many analysts believe that net interest margins will be bottoming out for banks in the first half of 2024 and then begin to increase. Furthermore, with the anticipated decrease in interest rates, the value of banks' long-term bond holdings is poised to increase.

However, given BAC’s mixed analyst estimates and profitability, it could be wise to wait for a better entry point in the stock.

How Does Bank of America Corporation (BAC) Stack up Against Its Peers?

BAC has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Foreign Banks industry: Erste Group Bank AG (EBKDY), KB Financial Group Inc. (KB), and Banco Santander, S.A. (SAN). To explore more Buy-rated Foreign Banks stocks, click here.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

BAC shares fell $0.21 (-0.61%) in premarket trading Tuesday. Year-to-date, BAC has gained 1.46%, versus a -0.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining 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.


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