Bank Of America Struggles Ahead Of Earnings, Following 'Brexit'

In response to the U.K. vote to leave the European Union, combined with sluggish growth, Wall Street analysts cut back their forecasts for bank profits for the remainder of 2016, as well as for 2017. Before Brexit, three-quarters of analysts predicted that the Federal Reserve would raise interest rates and thus spur the profits of big banks. After the U.K.'s vote to leave the EU, however, just 20 percent of analysts report that they still believe the Fed will increase the rates. This downgrading of profit forecasts comes just as Bank of America (NYSE:BAC) prepares to release its second-quarter earnings report on June 18, 2016.

In reaction to Brexit, analysts cut their predictions for Bank of America's second-quarter earnings by 8 percent. The bank is also expected to show a 24 percent decrease in profits compared to a year ago. The trimming of expectations has gone on for longer than just the post-Brexit time. Analysts have been cutting their profit estimates for the banks since 2015, long before the U.K.'s decision to leave the EU.

Plummeting bond yields spell long-term misery for BAC

A Credit Suisse Group analyst indicated that even if the second-quarter report is good, it will mean very little for the long-term health of the bank over the next two years. He points to the combination of factors, including that the Fed is unlike to increase interest rates and that the long-term bond yields have plummeted. On Friday, July 15, 2016, the 10-year bond was trading at 1.5853 percent, which is up from its record-low close on Friday at 1.366 percent but down from its close one year ago on July 13, 2015, of 2.34 percent.

Recent performance and comparison with competitors

Total returns for Bank of America are -20.56 percent year-to-date. The bank's total return percentage for the past month is 2.94 percent. A comparison with the average for banks globally shows that they are down by -13.40 percent year-to-date overall. Bank of America currently faces significant pressure on its ability to earn profits from lending, given the flattened yield curve. Analysts predict the bank will suffer a loss of interest income that ranges anywhere from $400 million to $800 million.

Conclusion: Avoid BAC

Bank of America appears to be entering a long-term period, during which it is unlikely to show much improvement in its profits. The Brexit vote has added to the bank's woes, flattening the yield curve and making it more difficult for BAC to drive profits.

We recommend that investors view Bank of America with caution and avoid purchasing shares at this time.

For those looking for alternative financial picks, Wells Fargo (NYSE:WFC) could benefit from a delay in interest rate rises with its large mortgage business.

Disclosure:  I wrote this article myself, and it expresses my own opinions. I have no positions in the stocks ...

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Chee Hin Teh 8 years ago Member's comment

thanks for sharing