On Wednesday, Bank of America (BAC) is scheduled to report Q3 earnings and as a Dow Jones Industrial Average component along with the last major US based bank to report earnings, what it reports will be closely watched. Likewise, Bank of America is trying to move out from under the shadow of the financial crisis and its disastrous acquisition of Countrywide Financial before the crisis and it's not much better acquisition of Merrill Lynch as Lehman Brothers was collapsing (which apparently, was forced upon it by the government) with lawsuits stemming from the later deal being settled just a few weeks ago. With that in mind, will Q3 earnings reveal that Bank of America has finally moved beyond the shadow of the financial crisis so that it can focus on running its banking business again or are there still troubles not yet resolved?
The Numbers Wall Street Expects From Bank of America
According to the latest summary of analyst estimates from Yahoo Finance, the Wall Street consensus expects Bank of America to report a 23.10% revenue decline to $21.89 billion along with a net loss of $0.07 per share vs. $0.56 for the same period last year. The current EPS consensus estimate of a net loss of $0.07 is in contrast to the net income of $0.14 per share consensus number three months ago.
For the year, the Wall Street consensus for Bank of America calls for a 3.30% revenue decline to $90.40 billion while EPS is expected to rise from $0.01 to $0.34. And for next year, the Wall Street consensus expects a 2% revenue rise to $92.25 billion along with an EPS rise from $0.34 to $0.91. Nevertheless, investors need to keep in mind that these Bank of America estimates for revenue and earnings could still make big moves in either direction depending on a number of factors like the housing market and government regulation.
In addition, investors should keep in mind that several large bank or investment banking stocks like Wells Fargo (WFC), Citigroup (C), Morgan Stanley (MS) and Goldman Sachs (GS) will have already reported earnings before Bank of America does while regional bank stock U.S. Bancorp (USB) will also be reporting earnings on Wednesday October 17th.
What Bank of America Reported Last Earnings Season
The last time Bank of America reported earnings, it largely beat Wall Street expectations by reporting a 64% revenue rise to $22.2 billion and earnings of $2.5 billion (or $0.19 per share) vs. a net loss of $8.8 billion (or $0.90 per share) a year earlier thanks to improved commercial lending and credit quality.
Specifically, Bank of America's management noted that lending to commercial businesses had increased for the sixth straight quarter while small business lending and commitments were up 23% with consumer credit being in the best shape in years. Hence, Bank of America had set aside $1.8 billion during the quarter to cover bad loans, down 46% year-over-year and the lowest figure since the first quarter of 2007, meaning the bank expects more customers to repay their loans on time. Bank of America also said it will generate cost savings of $8 billion through the various cost cutting measures (e.g. layoffs) it has implemented over the past year.
However, the consumer unit hit overall results with revenues falling $1.4 billion from the year ago period due in part to new government regulations. In addition, while Bank of America issued more mortgages during the quarter, that unit lost money as the bank is still trying to clean up the mess left over from its ill fated acquisition of Countrywide Financial (although it has already paid $8.5 billion to settle claims from investors who had purchased its mortgages or mortgage-backed bonds but claimed they had been misled about the quality of the mortgages contained therein).
What You Need to Consider
With the above in mind, Bank of America has moved closer to closure on the issues surrounding its Merrill Lynch acquisition. Specifically, in late September, Bank of America announced a settlement in a 2009 class action lawsuit brought on behalf of investors who purchased or held the bank's securities at the time of the announced acquisition of Merrill Lynch that alleged investors had been mislead about the financial health of both entities. Under the terms of the proposed settlement, Bank of America will pay a $2.43 billion settlement and put in place certain corporate governance policies. The settlement will also hit earnings by around $0.28.
On the other hand, as Bank of America and its competitors try to move beyond the legal fallout from the financial crisis, it's just been announced that a class action suit has been fined against 12 banks (including Bank of America) claiming that the interbank offered rate (LIBOR) manipulation increased adjustable mortgage repayment rates. And while it's still unclear if any lawsuit involving LIBOR manipulation has any merit, what is clear is that the more time Bank of America and other big banks spend fending off lawsuits or bank regulators or negotiating legal settlements means they have less time to focus on what matters - running their banking businesses in the most efficient and safe way possible.
A Final Word About the Coming Bank of America Earnings Report
It's difficult to tell how the market will react to Bank of America's Q3 earnings report as the settlement of issues surrounding its acquisition of Merrill Lynch will no doubt muddy the waters for investors looking over the earnings report. On the other hand, that settlement means that Bank of America is finally one step closer to putting the financial crisis behind it. With that in mind, more conservative investors not already in Bank of America should hold off getting in until after the dust settles from the earnings report. Likewise, depending upon one's point of view, a smart move for traders might be to buy put or call options on Bank of America stock as again, there is a good chance of a surprise occurring that might move the bank's stock in either direction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.