Bank of America Q2 preview: Where next for BAC stock?

When will Bank of America release Q2 earnings?

Bank of America will release second quarter earnings before US markets open on Monday July 18. The bank will be holding a presentation for investors at 0830 ET.

Bank of America Q2 earnings consensus

Wall Street forecasts Bank of America will report a 5.8% rise in revenue net of interest expense to $22.8 billion in the second quarter and are expecting EPS to fall over 27% from last year to $0.75.

Bank of America Q2 earnings preview

It has been a rough start to the earnings season for US banks, with both JPMorgan and Morgan Stanley missing expectations in the second quarter. Both of them started to build reserves as the economic outlook becomes more uncertain and suffered from M&A deals and IPOs drying-up following the boom we saw last year. JPMorgan, the country’s largest bank, suspended its buyback programme as it builds its capital buffer and warned there would be consequences for the global economy as geopolitical tensions, rampant inflation, higher interest rates, tightening monetary policy and the cost-of-living crisis all take their toll.

That has set a sour tone ahead of Bank of America’s results and has already sent the share price tumbling on fears it will suffer a similar fate and share a gloomy outlook. Notably, the new head of US economics at Bank of America, Michael Gapen, said just this week that he is expecting a ‘mild recession’ this year as inflation continues to surge higher and encourages consumers to tighten their purse strings.

The bank’s topline is forecast to grow thanks to its consumer banking and global wealth & investment management divisions, which should counter a drop in revenue from its global markets and global banking units. Trading appears to be the one bright spot emerging this season as the uncertainty plaguing the markets has kept volatility high, although Bank of America may underperform relative to some of its rivals on this front considering its FICC unit focuses more on credit.

Earnings are forecast to drop thanks to tough comparatives from the year before, when EPS almost trebled as the release of reserves bolstered its bottom-line. The bank booked a provision for credit losses of $30 million in the first quarter, but this is expected to soar to over $604 million in the second, whereas the year before it flattered its results by releasing over $1.6 billion. However, analysts believe its overall level of reserves will remain broadly flat – but this will be closely watched given other banks have set aside more than markets anticipated.

Bank of America has seen costs climb this year but has proven to have a better grip compared to most of its rivals. We could see the bank keep costs flat over the full year, which would be impressive given the inflationary environment. That would position it well to capitalise from higher interest rates, which should improve its net interest income. Investors will want to see evidence that demand for loans remains healthy as this will determine how much Bank of America will benefit from higher rates.

The bank ended the first quarter with a CET1 ratio, which measures each bank’s ability to weather a severe economic downturn, of 10.4%. However, the Federal Reserve’s recent round of stress tests, which analyse how well the industry would fare in troubled times, said that needs to rise to 10.5% later this year from the previous minimum of 9.5%.

The need to funnel more cash so it can strengthen its buffer has caused concern that it could result in less being returned to shareholders. Still, Bank of America said it was raising its quarterly dividend to $0.22 in the third quarter from the $0.21 to be paid for the second soon after the stress test was completed, and had over $17 billion left to return through its $25 billion share buyback programme at the end of March – although we could see the brakes applied if it needs to direct more cash to its buffer.

Where next for BAC stock?

Bank of America shares have slipped to fresh lows today, slumping to levels not seen in over 17 months in early trade as the results from JPMorgan and Morgan Stanley cast doubt over the upcoming results.

The downtrend that has been in play since mid-February remains intact and the stock has slipped below the $30 mark today. The stock is now testing the $29.90 level of support seen back in late 2020. The RSI is on the cusp of entering oversold territory to suggest the $29.90 floor should hold, and a recent drop in volumes suggests the current downtrend could be running out of steam, but a break below here would open the door to $28, after which $26.50 comes onto the radar.

The stock’s first upside target is at the July-high at $32, which should allow it to break out of the downtrend. The 50-day moving average, which currently sits at $34, has held as a firm ceiling over the past three months and could prove a more significant level that could allow the June-high of $37.50 to come into the crosshairs. The 26 brokers that cover the stock remain extremely bullish and have an average target price of $42.35, largely in-line with the 200-day moving average and implying over 40% upside from current levels.

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