• Bank of America stock is up 34% ahead of the Q3 report.
  • Q3 Earnings and revenue are expected to top estimates.
  • The focus is on the interest income and investment banking segment.

Bank of America is scheduled to report its third-quarter results before the market opens on October 14, 2021. The earnings reports come amid renewed investor interest in banking stocks as yields rise and the U.S. Federal Reserve moves to taper the accommodative policy that has put pressure on the sector.

Rising Treasury yields have been one of the catalysts in fuelling Bank of America’s rally to 13-year highs. The stock is currently trading at levels last seen in 2008 as the financial crisis was starting. The stock is up by more than 34% for the year outperforming the overly stock market that has pulled back from record highs.

Chart showing BAC stock at 13-year highs

The bank is likely to deliver better-than-expected Q3 results driven by smaller provisions for loan losses and an increase in net interest income. Bank of America has been at the forefront in investing excess cash in government and mortgage-backed securities.

The bank is also believed to have benefited from releasing reserves from pandemic-related loan losses. Banks have already released 60% of a combined $50 billion of the reserves and put them in income-generating investments.

Q3 Expectations

Wall Street expects Bank of America Q3 earnings to land at $0.71 a share, representing a 39% year-over-year increase. Revenue should climb 7% to $21.7 billion. The EPS estimate has increased by 56%. Much of the growth will come from the release of the company’s reserves, given the size of the bank’s consumer business.

In the second quarter, the bank posted mixed results with revenues missing estimates and declining 5% year-over-year, owing to lower interest income. Interest rate headwinds have been a big problem the past year, with the Federal Reserve keeping the benchmark rate at record lows.

However, higher revenues from investment and brokerage services have been a soft spot helping offset losses in some segments.

For the full year, Bank of America is expected to see an 88% jump in earnings per share, with revenues increasing by 3%

What to look out for

When Bank of America reports, the focus will be on the wealth management, card income, and service segment expected to offset any slowdown in interest income. The investment banking division should also be in the spotlight following the record-breaking quarter of takeovers from which the bank generates significant fees.

Additionally, the market will pay close watch to net interest revenue as it accounts for a big chunk of total revenue. With interest rates at record lows, banks have struggled to generate significant revenue compared to levels before the COVID-19 pandemic came calling, forcing the FED to cut interest rates.

A 39% jump in Bank of America profits could be driven by small provision for loan losses and an increase in net interest income.

Unlike other banks, Bank of America could put more interest income as it has started investing its excess cash in U.S. government securities. Rising treasury yields has all but increased the prospects of generating significant returns on this front.

Valuation

In the recent past, Bank of America has increased its dividend from $0.18 a share to $0.21 a share, affirming increasing free cash flow. In the second quarter, the bank repurchased $4.2 billion worth of stocks with expectations high it will repo $5.5 billion in Q3 and Q4.

While trading at $44 a share, Bank of America is trading at 2x its tangible book of $21 a share. It is also trading at 12X and 13X multiples for the 2021 and 2022 EPS estimate.

Bottom line

Bank of America sentiments in the market have improved significantly, going by the 30% plus gain year to date. A solid earnings report could trigger another leg higher as Treasury yields rise and the FED moves to ease monetary policy.