Bank of America, America’s second largest investment bank report fourth earnings Friday along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC). Bank of America said third-quarter profit fell 8% to $7.1 billion, or 81 cents a share, as the bank booked a $898 million provision for credit losses in the quarter. Analysts will be looking at loan growth numbers. How strong is loan growth and in what areas? What quality is that debt? How much has the slump in housing and mortgage origination hurt profits?
Bank of America Corporation NYSE: BAC Report Earnings Before Open Friday
Bank of America Earnings Preview
Q4 2022 earnings release at 6:45 a.m. ET; conference call at 9:30 a.m. ET
- Projected EPS: 78 cents
- Projected revenue: $24.3 billion
Mortgage Market Slowdown
Bank of America is the largest mortgage lender in the US, with mortgages applications falling its profits will fall accordingly. November US existing home sales from the National Association of Realtors fell 7.7% month-over-month in November to a seasonally adjusted annual rate of 4.09 million (consensus 4.20 million) versus an unrevised 4.43 million in October.
That is the tenth straight month that existing home sales have fallen. Total sales in November were down 35.4% from a year ago. Median price growth has slowed meaningfully as higher mortgage rates and inflation has enforced affordability pressures.
Bank of America Last Quarter Earnings
Higher Interest Rates Increase Revenue …. But at a Cost
Bank of America is one of the main beneficiaries of the Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing them to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks have continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.
FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.
Last quarter BAC’s evolving provision for credit losses showed the company was beginning to factor in a harsher economic outlook.
While Bank of America released $1.1 billion in reserves in the year-earlier period, in the third quarter the firm had to build reserves by $378 million. That, in addition to a 12% increase in net charge-offs for bad loans to $520 million in the quarter, accounted for the $898 million provision.
Investment Banking Losses
Last quarter investment banking revenue posted steep declines, falling about 46% to $1.2 billion, slightly exceeding the $1.13 billion estimate.
Analysts Outlook on Banks
RBC Capital Markets – Gerard Cassidy
NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”
Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.
Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”
“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”
Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,
“Peak loan growth in the current cycle could be behind us.” Fourth-quarter results are likely to show loan growth at a “solid” but moderated” pace. “Particularly concerned” about the slowing pace of CRE. Noted it typically takes around a year after the Fed begins a rate-hike cycle for loans to “begin rolling over.”
Loan growth could go two ways: either momentum builds in higher-yielding segments alongside increasing commercial utilization rates, or “cautious corporates and a weaker consumer” causes “loan growth [to] grind to a halt.”
“While loans have been growing, deposits have been shrinking,” “Depositors are waking up and starting to demand yield on their cash”.
Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”
Source: BAC, TC, WSJ
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From The TradersCommunity Research Desk