Bank of America Stock Will Likely Climb on Its Q2 Earnings

Good things could be coming for Bank of America (NYSE:BAC). BAC stock is likely to climb slightly after the company reports its  second-quarter results tomorrow. Meanwhile, over the longer term, the bank’s outlook remains strong.

Street view on Bank of America branch in NYC with people waiting, pedestrians crossing, crosswalk, bike, road in Manhattan
Source: Andriy Blokhin / Shutterstock.com

How is this possible? Some investors probably think that Bank of America’s operations are somewhat similar to those of Wells Fargo (NYSE:WFC). Both are large banks that have historically focused on lending in the U.S.

But Bank of America’s Q1 results showed that it has built up a very strong trading and fixed equity business. Wells Fargo can’t say the same.

Specifically, Bank of America’s Global Markets business, which includes its fixed income and equities trading operations, generated revenue of $5.2 billion. That was up tremendously from just $1.04 billion during the same period a year earlier. Moreover, Global Markets’ net income jumped to $1.7 billion from $670 million.

The unit probably did very well again in Q2, as high volatility and continuous gains by some equities made trading very easy and lucrative. Meanwhile, Bank of America’s fixed-income unit was probably helped by extremely low interest rates which likely caused its clients to invest hundreds of millions more in the bank’s fixed-income offerings.

BAC Stock Is Similar to JPM, Not WFC

Indeed,  JPMorgan Chase’s (NYSE:JPM) fixed-income revenue soared an incredible 99% year-over-year to $7.3 billion. Its Equity Markets revenue jumped 38% YOY to $2.4 billion. The net income of JPMorgan’s Corporate and Investment Bank — which includes its fixed-income and trading units — more than doubled to $5.46 billion last quarter from $2.5 billion during the same period a year earlier.

Conversely, in the second quarter, Wells Fargo’s Wealth and Investment Management unit generated net income of just $180 million.

JPMorgan reported Q2 earnings per share of $1.38, versus average estimates of $1.23. Its revenue came in at $32.98 billion, $22.75 billion above the mean outlook.

On the other hand, Wells Fargo reported a per-share loss of 66 cents, versus analysts’ calls for a 10-cent loss. The bank’s top line was $17.84 billion, $460 million below mean estimates.

Given the performance of Bank of America’s Global Markets unit in Q1, I expect the bank’s overall Q2 results to be much more similar to JPMorgan’s earnings than those of Wells Fargo.

Big Bank Risks Are Already in the Open

One good think for Bank of America is that investors already know the negatives. Most of the large banks saw net interest income drop due to the decline of interest rates. For example, Wells Fargo’s net interest income in Q2 fell to $9.88 billion from $12.1 billion, while Citigroup’s (NYSE:C) dropped to $11.08 billion versus $11.66 billion in the same period a year earlier.

Meanwhile, banks’ provisions for loan losses surged as they opted to be extremely conservative. JPMorgan’s allowance for credit losses jumped to $34.3 billion in Q2 from $25.4 billion in Q1 and $14.3 billion in Q4 of 2019. Wells Fargo’s provisions soared to $9.5 billion in Q2 from $4 billion in Q1 and $503 million in Q4 of 2019.

In all likelihood, Bank of America will follow those trends by reporting a decline of its net interest income and a surge of its credit-loss provisions. But, as I mentioned earlier, that shouldn’t catch Wall Street by surprise.

The Bottom Line: Look for BAC Stock to Climb

Helped by the government’s intervention and reduced fears of the novel coronavirus, the economy has proven to be much more resilient than many expected. Additionally, many of the highest-paying sectors of the economy — including finance, healthcare, government, housing and tech — have been hurt little or not at all by the recession.

As a result, I don’t expect an economic collapse in the near term to medium term.

And over the longer term, the chances of a successful vaccine being introduced appear to be extremely high. AstraZeneca (NYSE:AZN), Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) have all developed vaccine candidates that appear likely to be effective.

In the fall and winter, there could be a gap in which the coronavirus is stronger than it is now and a vaccine is not yet ready. Once the vaccine is introduced, however, the economy will likely reach new all-time highs. The same goes for bank stocks, including BAC stock.

Some on the Street are probably excessively bearish on Bank of America’s Q2 because they expect its results to look more like Wells Fargo’s than those of JPMorgan. But Bank of America likely generated better-than-expected trading revenue, enabling BAC stock to climb. Keep a close eye on the stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.  As of this writing, Larry Ramer did not hold any of the aforementioned securities. 


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