Elevator Pitch
I still rate Bank of America Corporation (NYSE:BAC) shares as a Buy. In my prior update for Bank of America written on April 25, 2023, I assessed BAC’s stock price recovery potential following a correction driven by the banking crisis.
With this latest article, my focus is on the preview of Bank of America’s financial results for the second quarter of 2023. BAC’s Q2 2023 earnings should satisfy the market, as the current consensus financial projections for Bank of America have factored in its expected weaker second quarter performance. Looking forward, I expect Bank of America’s network expansion and dividend growth to act as positive share price drivers for the stock, which justifies my Buy rating for BAC.
The Sell Side’s Expectations Of BAC’s Second Quarter Financial Performance
Earlier this week, Bank of America issued a press release disclosing that it will announce its Q2 2023 results next week on July 18, 2023, Tuesday, before trading hours.
Wall Street expects BAC to deliver a decent set of results for Q2 2023, but the analysts think that Bank of America’s second quarter financial performance won’t be as good as that of the first quarter.
The current market consensus financial forecasts (source: S&P Capital IQ data) for Bank of America point to the company’s revenue increasing by +9.9% YoY from $22,688 million for Q2 2022 to $24,938 million in Q2 2023. But this represents an expected moderation in BAC’s top line growth, as the bank had achieved a relatively better +13.0% YoY revenue expansion for Q1 2023.
Bank of America’s earnings per share or EPS is projected to grow by +15.0% from $0.73 in Q2 2022 to $0.84 for Q2 2023 as per the analysts’ consensus financial estimates. However, this implies that the market sees BAC’s bottom line contracting by -10.6% QoQ in the second quarter of the current year.
In the next section, I touch on how I think BAC has performed relative to market expectations in Q2 2023.
My Bet Is On In-Line Earnings For Bank of America
I expect Bank of America’s actual second quarter earnings to meet Wall Street’s expectations. I am of the view that BAC’s Q2 2023 financial performance should be inferior to that of its Q1 2023 results, but this should have already been factored into the analysts’ consensus financial numbers.
Of the 25 sell-side analysts covering Bank of America’s shares, 10 of them have cut their Q2 bottom line estimates for BAC in the past three months, while only four analysts have raised their quarterly earnings forecasts during the same time period. Specifically, Bank of America’s consensus Q2 2023 EPS projection was lowered by -2.8% in the last three months.
It is reasonable to assume that the Wall Street analysts would have taken into account BAC’s recent management commentary at a sell-side investor conference and relevant third-party market data in making the relevant changes to their respective financial estimates.
At Bernstein’s 39th Annual Strategic Decisions Conference on June 1, 2023, Bank of America provided some color on its expected Q2 2023 financial performance. BAC highlighted at the recent Bernstein conference that “loan growth will be flattish this quarter (Q2 2023)” considering that “mortgages are sort of dead”, and it acknowledged that Q2 loan growth could be “a little bit less than we expected.” In contrast, Bank of America was guiding for “modest loan growth” at its Q1 2023 earnings briefing on April 18 this year.
Separately, Bank of America’s investment banking business is likely to have under pressure in the second quarter of this year. According to London Stock Exchange Group’s Investment Banking Scorecard (updated daily), BofA Securities’ estimated 2023 year-to-date investment banking fees were $2,694.9 million, which is equivalent to a -16.4% YoY drop as compared to its investment banking fees of $3,224.5 million for the same period last year. This is largely consistent with management commentary at the June 2023 Bernstein conference.
BAC expects to generate over $1 billion in investment banking fees for Q2 2023, and it noted at the Bernstein conference that its Q2 investment banking numbers are “not moving around down much” as compared to Q1. The bank reported investment banking fees amounting to $1.2 billion in Q1 2023. The $2,694.9 million year-to-date investment bank fees estimate for Bank of America include fees earned in the first two weeks of July, so the numbers do make sense. Considering both management guidance and third-party market data, I expect Bank of America’s investment banking business to record slightly lower revenue on a QoQ basis in Q2 2023.
In summary, my view is that BAC will achieve in-line earnings for the second quarter of 2023, as weakness in the bank’s Q2 loan growth and investment banking fees have been reflected in the consensus financial figures for Bank of America now.
Look Beyond Q2 Results
I am of the opinion that there won’t be any significant surprises relating to Bank of America’s Q2 earnings announcement as detailed in the preceding section. As such, it is time to focus one’s attention on the other key share price drivers for BAC.
In particular, I view Bank of America’s expansion plans in the US and its dividend growth outlook as positive stock price drivers.
With my earlier April 25, 2023 article, I emphasized that “there are still specific markets in the US where BAC has the potential to gain additional share.” My bullish view on Bank of America’s growth potential in its home market is validated by recent news flow. Seeking Alpha News recently reported on June 27, 2023 that Bank of America is “expanding into nine new markets this year”, which includes “four states where it hasn’t operated before.” As highlighted in this late-June Seeking Alpha News article, BAC is expected to have a presence in 39 states by end-2023, which will be still less than the 48 states that JPMorgan (JPM) is operating in. It is realistic to assume that there is still ample room for Bank of America to venture into new markets within the US, which points to a reasonably long growth runway ahead.
Separately, BAC recently revealed on July 5, 2023 that the company proposed to raise its quarterly dividend distribution per share by +9% from $0.22 previously to $0.24 going forward. I have a favorable view of Bank of America’s shareholder capital return approach relating to how it drives dividend per share growth. Bank of America mentioned at Bernstein’s 39th Annual Strategic Decisions Conference that it will be “raising the dividend consistent with the earnings (growth)” and targeting to “bring share count down” with opportunistic share repurchases. In other words, BAC’s dividend per share is expect to continue growing in the future, supported by both bottom line growth and a declining number of shares outstanding driven by buybacks. Consensus numbers (source: S&P Capital IQ) indicate that BAC’s dividend per share is forecasted to increase by +7.4%, 9.7%, and +9.2% for FY 2023, FY 2024, and FY 2025, respectively.
Concluding Thoughts
In the short term, I don’t expect any negative surprises when Bank of America releases its second quarter results next week. For the intermediate-to-long term, I view healthy dividend growth and strong network expansion potential to be key positive re-rating drivers for BAC. The above-mentioned factors support my Buy rating for Bank of America.
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