Wall Street isn’t expecting much good news from banks this earnings season, which very much works in Bank of America Corp’s (BAC) — and BAC stockholders’ — favor when the bank drops quarterly results after the three-day weekend.
It’s always good when analysts’ expectations are so low they can be tripped over. Witness JPMorgan Chase & Co. (JPM), which crushed Street views for earnings and revenue in the most recent period amid a bleak outlook for big bank earnings.
There’s every reason to expect Bank of America to be next.
BAC Has More Tailwinds Than Headwinds
Anxiety over the crash in oil prices and Chinese economy are rattling global markets, but they’re not all that important to Bank of America or BAC stock.
True, banks like JPM are raising their loan-loss reserves to cover the possibility of defaults in the oil and gas industries, but the reality is that the big banks don’t have that much exposure to the energy sector.
Noted analyst Dick Bove of Rafferty Capital Markets says that big banks’ total exposure to oil and gas comes to no more than 2% to 3% of their loan portfolios.
As for weakening global growth, the market is probably making too much of that too — at least in Bank of America’s case.
BAC is primarily a play on the domestic economy, which is enjoying stable if unspectacular growth. The labor market continues to improve — indeed, the U.S. is essentially at full employment — and even wages are at long last expanding.
By a number of measures, the housing market is back to pre-crisis levels and consumer spending, while hardly impressive, is trending up.
The biggest drags on BAC and other big bank’s results come from desultory capital markets activity, but that’s nothing new. Lower trading volumes in the lucrative fixed income, currencies and commodities market have been a fact of life for the industry for a long time now.
No, it’s not good news, but it should be more than discounted in the likes of BAC stock.
Lastly, looking beyond the most recent quarter is the fact that we are just at the beginning of a rate-hike cycle. Rates are still insanely low and their are a number of macroeconomic factors working against a rise in borrowing costs, but at least the Federal Reserve is committed to goosing them upward.
At some point, higher rates will give BAC and others relief from their highly compressed net interest margins, or the difference between what a bank pays for deposits and charges for loans.
Bank of America Looks Good Heading Into Its Report
The bottom line for Bank of America is that the outlook ain’t all that bad.
For the quarter just closed, analysts’, on average, forecast BAC earnings to rise to 26 cents a share from 25 cents a share in the year-ago period. Revenue is expected to grow not quite 5% to $19.86 billion.
If JPM is an instructive case, those projections will prove to be too low and we’ll probably get at least a one-session rally in BAC stock.
More importantly, even if fourth-quarter results come in ugly, that doesn’t mean BAC stock is automatically a bad bet for 2016.
Once the market-wide selloff burns itself out, the story could very well turn to the pretty okay domestic scene, and that will serve Bank of America shares just fine.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
