BAC Earnings Preview- The bar just got a lot higher for financials

The bank earnings season got off to a great start with industry giants JP Morgan (JPM) Wells Fargo (WFC), Citigroup (C), and Goldman Sachs (GS) handily beating expectations. The news has raised the bar for other financial institutions as we head deeper into the Q4 earnings season.

Bank of America (BAC) is set to report its Q4 earnings tomorrow, with analysts projecting EPS of $0.78, reflecting an 11.4% year-over-year increase, and revenue of $25.14 billion, up 14.5% from the same period last year. Expectations for key metrics include net interest income (NII) of $14.34 billion, slightly above last year’s $14.09 billion, and investment banking fees of $1.48 billion, representing a robust 28% growth compared to $1.15 billion in Q4 2023. Noninterest income is also forecast to jump to $11.04 billion, a significant improvement from $8.01 billion a year earlier, underpinned by strength in service charges and commissions.

Analysts anticipate improvement in operational efficiency, with the efficiency ratio (FTE basis) expected at 62.3%, a marked decline from the 80.2% reported in Q4 2023. Key balance sheet metrics such as average total earning assets are projected at $2.95 trillion, up from $2.83 trillion a year earlier, while total nonperforming loans are forecast to reach $6.34 billion, a modest increase from $5.63 billion. Tier 1 capital ratio and Tier 1 leverage ratio are estimated at 13.0% and 6.8%, respectively, reflecting stability in BAC’s capital position despite slight declines from last year.

Market sentiment is optimistic, driven by BAC’s potential to benefit from a “capital markets renaissance” in 2025, which could boost its investment banking and trading revenues. Peers such as JPMorgan and Wells Fargo posted strong results earlier, raising expectations for BAC’s performance, particularly in its trading and wealth management segments. Analysts also highlight the company’s share buyback capacity, with estimates suggesting up to $18 billion in repurchases in 2025, equivalent to 5% of its current market capitalization, supported by its robust capital position and regulatory tailwinds.

With recent upgrades from UBS, CITI, and Truist, analysts underscore BAC’s valuation appeal compared to peers like JPMorgan. UBS notes BAC’s ability to benefit from deregulation and projects upside from a lighter Basel III framework. Additionally, CITI emphasizes potential tailwinds for NII growth and operational leverage, predicting net interest margin expansion to 2.14% by 2026. These factors, coupled with strong Q4 expectations, position BAC as an attractive play for long-term investors seeking exposure to improving efficiency and return metrics in the banking sector.

At the Goldman conference on December 10, Bank of America CEO Brian Moynihan highlighted the need for the U.S. to finalize Basel III capital regulations in a rational manner. He expressed confidence in net interest income (NII), expecting it to reach around $14.3 billion in Q4, and noted record trading performance and a 25% year-over-year increase in investment banking fees. Moynihan also projected a 20% rise in wealth management fees and pointed to robust M&A pipelines and a stronger IPO market for 2025. Additionally, he commented on the favorable regulatory environment under the Trump administration, which he believes is aiding companies and facilitating deal activity.

Bank of America delivered a solid third-quarter earnings performance, beating analyst estimates with earnings per share (EPS) of $0.81 versus the $0.77 consensus and revenue of $25.49 billion against a $25.3 billion estimate. Despite net income declining 12% year-over-year to $6.9 billion due to higher provisions for credit losses and rising expenses, the bank showcased strength in its investment banking and trading businesses. Investment banking fees surged 18% year-over-year to $1.4 billion, and trading revenue grew 12% to $4.9 billion, driven by strong performance in fixed income and equity markets, which outpaced expectations. Net interest income (NII), a key metric, fell 2.9% year-over-year to $14.1 billion but exceeded forecasts and showed sequential improvement, suggesting a potential inflection point.

The trading division played a pivotal role in the quarter's results, with fixed income trading revenue rising 8% to $2.9 billion, supported by strength in currencies and interest rate activities. Equities trading jumped 18% to $2 billion, bolstered by higher cash and derivative volumes. Additionally, BAC benefited from a diversified revenue base, with its wealth and investment management business generating $5.76 billion, exceeding estimates. Analysts noted that the bank's trading and advisory operations provided a crucial boost, similar to the strength displayed by rivals like JPMorgan Chase and Goldman Sachs during the quarter.

One of the key drivers of performance was BAC's ability to navigate a challenging interest rate environment. While rising rates pressured NII year-over-year, the metric improved sequentially, reflecting stabilizing deposit costs and robust loan activity in areas like credit cards and small business lending. However, the bank remains cautious about loan growth and the potential impact of further rate cuts on NII, as the CFO noted that a 100-basis-point cut could reduce NII by $2.7 billion annually. Credit quality remained strong, with provisions for credit losses at $1.5 billion, slightly below expectations, and net charge-offs in line with estimates.

Looking ahead, BAC's management provided a positive outlook, projecting Q4 NII of $14.3 billion or higher and expenses to remain flat compared to Q3. The bank continues to focus on capital efficiency, maintaining stable deposits at $1.93 trillion and expressing no immediate plans to reposition its securities portfolio. Despite rising expenses and lower net income, analysts view BAC's stock as undervalued, citing strong fundamentals, improving NII trends, and robust investment banking performance as key factors driving its recovery and potential upside.