I’ve been a big bull toward Bank of America Corp (NYSE:BAC) for quite a while. And although it took some time for a breakout, BAC stock has finally come around. The stock gained 33% in 2017 and it has gained roughly 150% just since July of 2016.
I’m still optimistic toward Bank of America stock, even after the most recent rally, as I wrote a month ago.
Still, I don’t expect much from BAC stock coming out of the company’s Q4 earnings report Wednesday morning. If anything, the release looks like a potential trap.
Broad markets have been just as torrid in 2018 as they were in 2017 (if not moreso). The banking sector has gained sharply: Bank of America stock has gained 12% since Dec. 1, as has Wells Fargo & Co (NYSE:WFC); JPMorgan Chase & Co. (NYSE:JPM) has tacked on a 7%+ gain.
There’s a lot of optimism toward BAC stock at the moment. At least some of that optimism is getting priced in. Meanwhile, long-term tailwinds, such as the recently enacted corporate income tax cut and — at some point — higher interest rates won’t be reflected in Q4 results. And there’s two key areas that could trip up the stock out of the earnings report.
Again, longer-term, I still like Bank of America stock. But I see real short-term risk in Wednesday’s report.
How BofA Earnings Can Go Wrong
I noted back in December that there were two key areas of concern for BAC stock. Both are likely to figure prominently in the coverage of the fourth-quarter release.
The first area of risk is in trading revenue. Here, at least, expectations should be low. BofA already warned investors that trading revenue was likely to decline roughly 15% year-over-year in the quarter. JPMorgan posted a difficult quarter itself, with fixed-income trading revenue falling 34% and the company taking a $143 million hit from a margin loan tied to struggling Steinhoff International.
But Bank of America needs to convince investors that 2017’s weakness is coming from unusually low volatility — not market share losses or a structural change in fixed-income markets, in particular.
The second concern, and the more pressing as far as Q4 goes, is in the credit card business. BofA has steadily lost market share over the past few years. JPMorgan has had a big hit with its Sapphire Reserve, as Luce Emerson pointed out back in September. But a Bloomberg analysis showed that Bank of America has slipped behind Citigroup Inc (NYSE:C) and Capital One Financial Corp. (NYSE:COF) as well.
Here, too, the market likely will be patient. Those market share losses won’t be reversed in a single quarter. But as the valuation of BAC stock creeps up, investors will be looking for more. At the least, CEO Brian Moynihan needs to detail an aggressive strategy to get Bank of America back in the credit card game.
Don’t Panic If BAC Stock Dips
Again, there’s not enough here to toss the bull case for BAC stock. BAC remains cheap on both a price-to-earnings and price-to-book basis. It does look like Fed rates are finally going to tick up, boosting margins for BofA and the sector as a whole. Credit quality remains strong, barring an unforeseen change in the Q4 numbers.
But expectations need to be tempered somewhat. While Bank of America stock has gained 150% since July 2016, its gains have come in bunches. The stock soared coming out of the election, then pretty much flat-lined for the first nine months of 2017.
I wouldn’t be surprised to see similarly choppy trading this year as investors wait for the impact of corporate tax cuts on the sector and action from the Federal Reserve. BAC stock might take some patience, both in terms of the performance of the stock and the earnings growth investors are looking for.
In the end, however, I still think that patience will pay off.
As of this writing, Vince Martin has no positions in any securities mentioned.