BAC Stock – Bank of America Earnings Should Keep the Rally Alive

by Dan Burrows | January 14, 2014 11:57 am

BAC Stock – Bank of America Earnings Should Keep the Rally Alive

The Bank of America (BAC[1]) earnings report lands Wednesday and the market will be keen to see if costs cuts and the release of reserves can continue to juice profits — and keep the rally in BAC stock alive.

Bank of America BAC Stock   Bank of America Earnings Should Keep the Rally AliveIndeed, BAC stock has been far and away the best-performing big-bank stock over the last year. BAC stock is up 45% during the past 52 weeks, beating the S&P 500 by almost 20 percentage points.

The Bank of America earnings report could go a long way toward supporting further gains in BAC stock. For the fourth quarter, Wall Street expects Bank of America earnings to benefit from very easy year-ago comparisons.

Bank of America earnings are forecast to rise to 26 cents a share from 3 cents a share in last year’s fourth quarter. However, like JPMorgan Chase (JPM[2]) and Wells Fargo (WFC[3]), Bank of America earnings are likely to show top-line weakness[4]. Revenue is projected to slip 1.9% to $21.24 billion.

BAC stock should get support from lower expenses and higher credit quality. Cost cuts and the release of reserves have been boosting big-bank profits for years now, and that’s expected to continue with Bank of America earnings. Asset sales are also helping boost BAC stock. The firm has sold $70 million in non-core assets over the last three years.

BAC Stock: No Help From Home Loans

That should make up for slower results in lending and home-loans — a problem for all big banks these days. Mortgage originations will contribute less to Bank of America earnings, as rising rates ended the frenzy in refinancing activity some time ago, and now home-loans are cooling off too.

Meanwhile, lending is expected to pick up along with the economy later this year, but for now, it won’t do much for Bank of America earnings or BAC stock.

Investment banking will also continue to be weak, even as initial public offerings and mergers and acquisitions gain traction. Despite the market notching all-time highs, trading remains quiet, especially in fixed income, currencies and commodities. Fortunately for anyone holding BAC stock, trading revenue accounts for only about 15% of the top line in Bank of America earnings, according to an analysis by Trefis.

But the name of the game in Bank of America earnings is still going to be cost cuts. A leaner, meaner bank is behind much of the rise in BAC stock. Bank of America completed the merger of Merrill Lynch into the parent company during the quarter, which should yield more savings.

Another possible short-term catalyst for BAC stock is an earnings beat. Bank of America earnings have exceeded analysts’ average estimates in three of the last four quarters, according to data from Thomson Reuters.

Most importantly, BAC stock should benefit from what is expected to be a good year for big banks. A stronger housing market and accelerating economy should translate into good things for Bank of America earnings — and BAC stock — over the course of 2014.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  3. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  4. top-line weakness: http://investorplace.com/2014/01/jpm-stock-wfc-stock-earnings-reports/

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