Bank of America (NYSE:BAC) is set to report earnings next Wednesday, April 16th, so in advance of that I thought it would be instructive to see what analysts are expecting and what that means for BAC shareholders. In addition, we'll take a look at BAC's prospects based on some anecdotal information we've received since the last earnings report.
Analysts are expecting BAC to post earnings of only five cents per share on revenue of $22.33 billion, both of which are decreases from the year ago quarter. Last year's first quarter saw 10 cents of EPS on $23.5 billion in revenue on the back of strong mortgage operations. This year, as the refinancing boom has subsided, we are likely to see that segment drive revenue and profit lower in the first quarter. The other banks aren't immune to this effect but with BAC, be sure to pay close attention to how the mortgage operation reports and what kind of language management uses regarding this year's prospects for mortgage revenue.
There has been some good news since the last earnings report regarding BAC's robust litigation liabilities. For instance, BAC just settled with the CFPB over charges it unfairly pushed credit card consumers into additional products unfairly, whatever that means, so while another $800 million is walking out the door, at least that particular piece of uncertainty has been resolved. Then there is the Allstate case against BAC's Countrywide unit that has persisted for years now but has finally been resolved. Allstate just dropped the charges against BAC in a rare win for the banking giant in court; for once, shareholders aren't having their money confiscated for someone else's mistakes. These two events provide additional clarity regarding BAC's litigation liabilities and even though payments will be made, clarity is a net positive.
BAC, like the other big banks, has had its earnings estimates cut repeatedly in the recent past, including by Sterne Agee and Nomura just in the past week or so. Nobody wants to see earnings estimates cut but the issues cited - mortgage-related revenue and capital markets activity - are well-known and these cuts didn't surprise anyone. However, I do think they provide an opportunity for BAC to surprise to the upside when it reports.
Expectations are now very low for BAC headed into earnings and I think investors may get a surprise number to the upside. With the bar being so low for BAC at this point I think a miss would be very poorly received by the market. If that happens and the stock sells off, consider it a buying opportunity as near-term weakness in mortgages will pass and BAC will begin growing revenue again.
Revenue, in my opinion, is the most important part of this earnings report. We're all aware of banks' struggle to generate business in this tough environment and while the EPS number is important, I think investors will be more focused on BAC's revenue generation. If revenue surprises to the upside, I think we'll see shares rally even if EPS only meets estimates or even misses slightly. BAC has proven the ability to squeeze profit from revenue since Moynihan took over so I'm more concerned with BAC being able to grow its businesses' top lines than EPS right now.
Overall, the quarter is supposed to be pretty weak from BAC. Everyone and their brother expects revenue and EPS to decline from the year ago quarter and while I also expect that will happen, the bar is low enough that BAC could surprise us to the upside. Revenue for the first quarter and guidance for the full year will be key as investors, I believe, are more focused on BAC growing its business than focusing on a penny here or there of EPS. If we see revenue surprise to the upside and/or strong revenue guidance relative to expectations, I believe the stock will rally. If not, get ready to add to your position as shares will become cheaper next week.
Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.