On Friday, Bank of America Corp (NYSE:BAC) effectively — even if not officially — gets the first-quarter earnings season started with a report of its fiscal Q4 numbers. And all signs point toward the beginning of a fruitful 2017 for BAC stock.
Bank of America has been on a tear, earnings-wise, topping estimates in each of its past six quarters, and growing the bottom line for the past seven.
BAC stock has responded accordingly, gaining 31% in 2016 despite a 33% stumble right out of the gate, mostly in response to proverbial “daybreak” for the company. Not only did CEO Brian Moynihan get his bank over the Fed’s stress-test hump in late 2015 (and confirmed it in mid-2016), BofA almost immediately upped its dividend following the news. Shareholders had been patiently waiting on that for some time.
Will the big bank justify the run-up, or will the earnings report burst the bubble? On balance, Bank of America stock holders have more reason to be optimistic than nervous.
Bank of America Earnings Preview
As of the most recent look, the pros expect the company to post income of 38 cents per share on sales of $20.96 billion. BofA earned 27 cents per share in the same quarter a year earlier, when it generated revenue of $19.56 billion.
As was noted, Bank of America has tended to over-deliver relative to earnings expectations of late. This time around, though, some unique circumstances suggest a significant beat is even more likely than usual. Yours truly explained in mid-December that a flurry of trading activity and other situational developments could spur a “beat” of 7 cents per share.
Similarly, as Chris Tyler pointed out on Tuesday, BAC stock responded bullishly to five of the past six Bank of America earnings reports.
3 Things BofA Shareholders Should Watch
While Bank of America, like all banks, is a collection of several moving parts and impacted by a countless number of factors, there are three key drivers pushing and pulling on BAC stock right now. Getting a grip on these three matters will help current and would-be investors properly handicap where BofA shares are headed.
In no certain order …
- Return on Tangible Common Equity: One sore spot for BAC stock holders has been the bank’s sub-standard return on a balance sheet item called “tangible common equity.” The company’s return on that measure of equity had hovered in the low single digits for year, but finally started to perk up in 2015. It’s still short of the target level of 12%, but Q3’s reading of 10.3% got the bank awfully close to that goal. If it gets there, it will send a convincing and resounding message to the market.
- Rising Interest Rates: In October, Bank of America explained that a 100-basis-point increase in interest rates across the board could add as much as $7.5 billion in net income to the company’s books. In the meantime, though the Federal Reserve only put a quarter-point rate hike in place, market interest rates advanced about 60 basis points, and are positioned for higher levels as 2017 wears on. This is where the bank could find the biggest earnings growth this year. Any comments on interest rates should be well considered.
- Undoing the Dodd-Frank Act: This won’t show up in the books or even be discussed during the earnings call. But there’s a very real possibility that the Federal Reserve’s authority to prevent a bank from raising its dividend payout and initiating stock buybacks (if it didn’t think said bank was healthy enough) could be revoked. If that happens, BofA shares (and other bank stocks) could skyrocket.
Bottom Line for BAC Stock
Broadly speaking, victory on Friday is Bank of America’s to lose.
BAC stock soared in 2016 after a lackluster 2014 and 2015. Income has continued to grow the whole time, even without the benefit of higher interest rates. Now rates are actually higher — and were even in the latter half of calendar Q4 — and are poised to continue higher in 2017.
In the meantime, Moynihan has made a concerted effort to keep cutting costs, aiming to cull another $5 billion in spending by 2018. He found $400 million in unnecessary spending alone.
If Bank of America can’t get it right with that kind of tailwind in place, it’s nobody’s fault but it’s own.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
