Bank of America (NYSE: BAC) is expected to release its results for the third quarter of fiscal 2021 on Thursday, October 14. We expect Bank of America to beat consensus estimates for revenue, while earnings are expected to remain below expected number. The bank posted mixed results in the last quarter, with revenues missing the mark. It announced a 5% year-on-year decline in revenue, mainly due to lower net interest income due to headwinds on interest rates, coupled with negative growth in sales income and negotiation. The decline was partially offset by higher revenues from investment and brokerage services, card revenues and service fees. That said, the company’s net income rose sharply in the second quarter, mainly due to a significant reduction in provisions for credit losses. We also expect the same trend to continue in the third quarter.
Our forecast indicates that Bank of America Rating is $ 44 per share, which is on par with the current market price of around $ 44. Our interactive dashboard analysis on Bank of America Profit Overview has more details.
(1) Expected revenue higher than consensus estimates
Bank of America revenues for full year 2020 was $ 85.5 billion, down 6% year-on-year, mainly due to lower net interest income, partially offset by income growth sales and trading and investment banking.
- The company saw an 11% year-on-year decline in the NII to $ 43.4 billion in 2020 due to headwinds in interest rates and a lower new loan issuance rate. The NII contributes more than 50% of total revenues and therefore has a significant impact on its turnover. It continued its negative trajectory in the first and second quarters of 2021, decreasing by 16% and 5% year-on-year respectively. While we expect outstanding loans to see some improvement in the following quarters, a lower interest rate environment is unlikely to see an immediate recovery, hurting the NII.
- The bank benefited from the growth in sales & trading (+ 19%) and investment banking (+ 27%) revenues in 2020 thanks to higher volumes of trading and subscription operations. The same trend was seen in the first quarter of 2021. However, sales and trading revenues were down 14% year-on-year in the second quarter due to lower FICC trading revenues (fixed income, currencies and commodities) , partially offset by growth in equity trading. sub-segment. In addition, the investment banking income, which saw a big jump in the first quarter due to the rise in share subscription transactions, was at about the same level as a year ago. We expect investment banking and sales and trading revenues to normalize over the next few quarters.
- The wealth management segment decreased 5% year-on-year to $ 18.6 billion in 2020. This is mainly due to the lower net interest rate on wealth management loans and a slight decrease fees as a percentage of total customer balances, partially offset by an increase in average loans. and the customer’s total balance. While revenues were at the same level as a year ago in the first quarter, they grew 14% year-on-year in the second quarter. This growth is mainly due to the growth in total customer balances to $ 3.65 trillion, 9% above the level seen at the end of December 31. We expect the same trend to continue in the following quarters.
- Overall, we expect Bank of America’s revenue to remain around $ 88.4 billion for fiscal 2021.
Trefis estimates Bank of America’s tax revenue for the third quarter of 2021 to be around $ 22.05 billion, slightly above the consensus estimate of $ 21.78 billion. We expect growth in wealth management, card revenues and service fees to drive third quarter results.
Going forward, we expect Bank of America’s NII to suffer a bit more. In addition, sales and trading and investment banking activities are expected to normalize as the economy recovers. That said, the wealth management unit has the potential to drive the growth of the business, coupled with the non-interest income of core banking segments. Our dashboard on Bank of America revenues provides more details on the company’s operating segments as well as our forecast for the next two years.
2) BPA risks missing consensus estimates
Bank of America’s adjusted earnings per share for the third quarter of 2021 is expected to be $ 0.64 per Trefis analysis, almost 10% lower than the consensus estimate of $ 0.71. Profitability numbers suffered in 2020 due to higher provisions for credit losses – adjusted net income fell 37% year-on-year to $ 16.5 billion. However, the company reduced provisions in the first quarter of 2021 due to an improvement in its customers’ loan repayment capacity, resulting in a more than 100% increase in profitability. The same trend was evident in the second quarter, with adjusted net income increasing 173% to nearly $ 9 billion. This is due to an improvement in provisions for credit losses of $ 5.1 billion to – $ 1.6 billion and a positive tax adjustment related to the revaluation of net deferred tax assets in the UK. . We expect provisions to be further reduced in the third quarter.
Going forward, we expect BAC’s net margin figure to recover in fiscal 2021 due to a favorable decrease in provisions for credit losses. It is expected to translate into adjusted net income of $ 22.9 billion, up 39% year-on-year. This will allow the bank to report EPS of $ 2.73.
(3) Estimate of the share price largely around the current market price
We arrive at Bank of America Rating, using an EPS estimate of around $ 2.73 and a P / E multiple of just above 16x for fiscal 2021. This translates to a price of $ 44, which is at the same level as the price. of the current market of nearly $ 44.
Note: P / E multiples are based on the stock price at the end of the year and reported (or expected) adjusted earnings for the entire year
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