(By Mani) The margin of Bank of America Corp. (NYSE: BAC), or BofA, could be severely pressured given the flattening of the yield curve and increased likelihood that rates will remain low throughout the next year. However, a cheap valuation, good cost controls, and better positioned to benefit from economic turnaround makes it a better choice among its peers.
Given the recent decline in rates, BofA's net interest income could be hurt in the second quarter of 2012, and could see a reversal of the last quarter's nearly $500 million benefit from slower premium amortization, and reduced hedge ineffectiveness.
"Going forward, BofA will see lower interest expense from having just retired $40B of parent company debt, but beyond that the margin is still likely to see some gradual downward pressure until rates rise," RBC Capital Markets analyst Joe Morford said in a client note.
Meanwhile, capital markets businesses have slowed in the quarter after a robust first quarter due to a drop in investment banking activity, which sequentially fell about 23 percent, according to Dealogic.
Along these lines, the company's recent second quarter outlook suggests that trading and banking revenues would decline sequentially, but still be better than the second half of 2011.
BofA could offset these potential revenue shortfalls from capital markets through putting a better show in the mortgage banking business and containing costs. Higher originations and healthy gain on sale margins driven in part by increased volumes in home affordable refinance program (HARP) should benefit mortgage banking.
Meanwhile, expenses should decline meaningfully following a seasonally elevated first quarter as well as additional savings from BAC's restructuring program -- Project New BAC, for which the Phase II targets should be disclosed with the second quarter earnings.