Bank of America (NYSE: BAC) is scheduled to report its fiscal Q1 2021 results on Thursday, April 15. We expect Bank of America to miss the consensus estimates for revenues, while earnings are likely to surpass expectations. While the bank has outperformed the consensus, earnings estimates in each of the last two quarters, primarily driven by a positive decline in provisions of credit losses on a sequential basis, its revenues have suffered due to weakness in core banking. Bank of America is heavily dependent on its core banking revenues, which suffered in 2020 due to lower consumer spending levels and interest rate headwinds. The company witnessed an 11% y-o-y drop in net interest income, which contributes around 50% of the total revenues. This led to a drop in the full year 2020 revenues, despite a 20% jump in the Global Markets segment driven by higher sales & trading and investment banking revenues. We expect the same trend to drive the first quarter FY2021 results, as well.
Our forecast indicates that Bank of America’s valuation is around $33 per share, which is 17% less than the current market price of around $40.
1 – Revenues expected to be below consensus estimates in Q1
Trefis estimates Bank of America’s fiscal Q1 2021 revenues to be around $21.66 billion, 2% below the $22.13 billion consensus estimate. Bank of America revenues of $85.1 billion for the full year 2020 were 6% lower than the 2019 figure. This could mainly be attributed to a lower interest rate environment and a decline in consumer spending levels due to the impact of the Covid-19 crisis, which led to weaker core-banking revenues. The bank has a substantial lending portfolio and hence is very sensitive to changes in the interest rate and consumer spending patterns – cumulatively $886 billion in consumer, commercial, and wealth management loans as per 2020 figures. The decline in top-line was somewhat offset by higher sales & trading and investment banking revenues. We expect the same trend to continue in the first quarter of FY2021.
The main support to BAC’s revenues in 2020 was growth in the Global Markets segment. However, with recovery in the economy, both the trading and underwriting deal volumes are likely to stabilize in the coming months, hurting the bank’s top-line. Further, the interest rates are unlikely to see an immediate revival – the Federal Reserve has maintained its benchmark rate near zero (as per the March 17th update). That said, the consumer spending levels have seen some recovery over the recent months and are likely to further improve in the subsequent quarters. Overall, the bank’s revenues are likely to decline to $85.1 billion in FY2021.
2 – EPS likely to beat the consensus estimates
Bank of America’s Q1 2021 adjusted earnings per share is expected to be $0.73 per Trefis analysis, almost 11% above the consensus estimate of $0.66. The bank’s profitability figures slipped in 2020, with its adjusted net income reducing by 37% y-o-y to $16.5 billion. This led to a decrease in EPS figures from $2.75 to $1.87. This could be attributed to two factors – an increase in operating expenses as a % of revenues from 60.2% to 64.6% due to higher compensation costs, and substantial build-up in provisions for loan losses from $3.6 billion to $11.3 billion. While the bank has seen some drop in its provisions for loan losses over the recent quarters – provisions in the fourth quarter were significantly lower (just $53 million) as compared to $1.4 billion in Q3, we expect the same momentum to continue in the FY2021 Q1 results.
The loan default risk is expected to further decline in the year with recovery in the economic conditions. This is likely to further reduce the provisions for loan losses, boosting its profitability. It is likely to enable BAC to report an EPS of around $2.40 in FY2021.
(3) Stock price estimate 17% lower than the current market price
Going by our Bank of America valuation, with an EPS estimate of around $2.40 and a P/E multiple of just below 14x in fiscal 2021, this translates into a price of $33, which is 17% below the current market price of around $40.
Bank of America Short (Sell)
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