Bank of America Q2 Earnings Preview: What to Expect
- BAC stock up 30% ahead of the Q2 earnings report
- BAC to post Q2 EPS of $0.77 - more than double $0.37 reported last year same period
- Q2 revenue expected to drop to $22.08 billion from $22.8 billion in Q1
- Trading revenue expected to drop owing to stimulus easing
- BAC to reiterate dividend hike and buyback program
Bank of America stock has been trending higher for the better part of the year. The stock is up by more than 30% year to date, outperforming the S&P 500, which is up by about 15.5%. However, the stock is down by about 6% from its 52-week high ahead of its second-quarter earnings report scheduled for July 14, 2021.
The financial services company is poised to report its second-quarter earnings at a time when most analysts expect banks to report a 28% drop in trading revenue. The decline would come at the backdrop of the easing of stimulus packages that was the catalyst to higher trading revenue last year. Stimulus packages have cooled off in the aftermath of widespread vaccinations resulting in the reopening of the US economy.
Another soft spot poised to arouse strong interest is loan growth, one area that has remained under pressure for the better part of the past year. Trillions of dollars in stimulus packages have meant that people and businesses are still flush with cash to demand more through bank financing.
BAC earnings expectations
Wall Street expects Bank of America to report earnings per share of $0.77 a share, more than double the $0.37 a share reported last year in the same period. On the other hand, revenues are expected to fall slightly to $22.08 billion from $22.8 billion reported in the first quarter. A decline in revenue would be mostly due to softer net interest income that accounts for more than 50% of the financial services company's total revenue.
Additionally, Bank of America is believed to have felt the full effects of lower interest rates and unexpected volatility on the quarter, believed to have taken a toll on the investment banking sales and trading divisions.
In the first quarter, the financial services company reported a net income of $8.1 billion or $0.86 per diluted share, up 115% year over year. Net revenue was up 0.2% to $22.8 billion and topped analysts’ estimates of $22.13 billion. Deposits in the quarter were up 25% to $924 billion, but loans fell 8% to $291 billion.
The CEO, Brian Moynihan, warned of the impact of low-interest rates that continued to pose significant challenges to revenue. During the quarter, the bank benefited from the record or near-record levels of deposit. Investment banking revenues were also up, helped by brand loyalty, customer satisfaction, and employee engagement surging to record highs.
What to look for when BAC reports
When Bank of America reports, the focus will be on the impact consumer spending had on the company's results. In the aftermath of aggressive stimulus packages aimed at stimulating the economy, consumer spending edged higher, with the bank’s CEO reiterating it is up 20% from pre-pandemic levels.
Consequently, it will be interesting to see the impact higher consumer spending had on the deposit base. Additionally, the focus will be on how high consumer spending affects BAC lending operations from which it generates most of its income.
Additionally, it will be interesting to see how the bank’s net interest yield is doing as it is a measure of the bank’s profit margin. While it has not ticked up dramatically owing to the prevailing record low benchmark rate, it is believed to have inched higher a little bit.
Over the past three quarters, it had first-quarter averaged 1.9%, slightly lower to the 2.77% before the pandemic got bad in 2020. Bank of America has already indicated that a small increase of about 1% is enough to translate to $8.3 billion in additional net interest income per year.
Buybacks and dividends
At the height of the pandemic, the Federal Reserve banned buybacks and capped dividend payouts in the financial sector. Fast forward, the central bank has lifted the restrictions paving the way for Bank of America and other banks to start buying back stock and reward shareholders with dividends.
Bank of America has already announced plans to increase its stock dividend by 17% to 21 cents a share, starting the third quarter after passing the Federal Reserve’s bank stress test. Currently, the bank pays an 18 cents dividend per share per quarter, translating to a dividend yield of 1.81%. A 21 cents a share dividend will translate to a dividend yield of 2.11%, much higher compared to an average dividend yield of 1.84% for the past five years.
Additionally, it has affirmed its commitment to returning value to shareholders by repurchasing $25 billion worth of common stock over time. For the year ended March 2020, the financial services company spent $28.24 billion on repurchases.
The record-low interest rate environment continues to affect Bank of America's ability to generate income optimally. However, CEO Moynihan has reiterated that the bank is stronger and more competitive than ever after bouncing back from the pandemic. Therefore, it will be intriguing to see if growth momentum continued in the second quarter after an upbeat first quarter.
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