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Bank Of America Corp. (BAC) Q2 Earnings Preview: What To Expect?

 July 12, 2013 02:20 PM

(By Mani) Bank of America Corporation (NYSE: BAC) is set to report its second-quarter 2013 financial results on July 17, 2013. The results are scheduled to be released at 7 a.m. ET, followed by an investor presentation at 8:30 a.m. ET.

Wall Street expects the Dow component to report earnings of 25 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 31.6 percent from last year when BAC earned 19 cents a share.

Bank of America earnings managed to beat Street view thrice in the last four quarters, with upside surprise in the range of 35.7 – 100 percent.

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During the last 30 days, eight analysts have upped their earnings view on BAC three of them have cut their EPS outlook for the quarter.

Quarterly revenues are expected to grow 3.7 percent to $22.79 billion from $21.97 billion in the same quarter last year.

The entire banking sector is facing the headwind of lower fee income due to tighter mortgage origination spreads and lower interest rates. As the entire market is eyeing the Fed's next move for interest rates, banks will be expecting a period of transition once rates do rise.

As a result, BAC's net interest margins (NIMs) are likely to remain under pressure in the second quarter given low interest rates and sluggish loan growth.

"We expect NIM compression of 3bps q/q in 2Q with slightly weaker net II (of $10.7b vs. $10.9b in 1Q). Given higher 10-year and mortgage rates, we expect some benefit from lower premium amortization, although this benefit may be partially given higher housing price assumptions," Deutsche Bank analyst Matt O'Connor wrote in a note to clients.

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Trading revenue (ex-CVA/DVA) could decline sequentially due to seasonality, but up compared to last year. Similarly, Investment Banking fees could rise in double digits from last year on higher assumed equity and debt capital markets volumes.

"Despite a less favorable environment in June (vs. April/May), we sensed that capital markets revenues in 2Q should be higher vs. a year ago (we est. 11%), given a better environment for FICC (we est. FICC up 5% y/y) and equities (we est. +25% y/y) in 2Q," O'Connor said.

Investors would be focusing on loan and mortgage origination trends, and should keep an eye on operating expenses to get a hindsight of the cost control measures of the bank.

In addition, the market will look for comments over its mortgage settlement issues with AIG. Bank of America has rejected a request from insurer American International Group, Inc. (NYSE: AIG) and other investors to renegotiate the $8.5 billion settlement deal that was struck in July 2011 over soured mortgage-backed securities.

Meanwhile, peers JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) have reported better-than-expected earnings for the second quarter. JPMorgan reported a 31 percent jump in second-quarter profit, on higher investment banking as well as asset management revenues.

Wells Fargo reported a 20 percent rise in quarterly profit as provision for credit losses declined and positive momentum in the residential real estate market provided the boost for the bank.

For the first quarter, BAC's net income surged to $2.62 billion or 20 cents a share from $653 million or 3 cents a share in the prior year. Total revenue, net of interest expense, advanced to $23.5 billion from $22.28 billion.

Since reporting its first quarter results, BAC stock has increased 15 percent and gained 80 percent in the past one year. BAC shares, which has a market cap of more than $147 billion, trade 10.3 times its 2014 consensus EPS estimate.

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