Bank Of America’s earnings release came out on July the 18th of 2022, whereby a decrease in the EPS was shown, reading a value of $0.73 compared to the forecasted result of $0.75.
This came as no surprise, as most of the banking and financial sector benefited from the aggressive rate hikes issued by the federal reserve in fighting inflation.
However, rate hikes tend to benefit banks in the short run, as clients that already own credit, will be paying higher interest..
The increase of rates by the federal reserve has a direct effect on the U.S. bank's rate, consequently affecting the lending, and borrowing costs for corporations and individuals.
Which, in other words, will have a direct impact on the credit cost of retailers.
Figure 1: Source: TradingView, Bank Of America 1hr Time Frame
According to Figure 1, we can see that once the earnings of Bank of America were released, the stock price gapped over $0.81/share, which was closed in that same hour.
Furthermore, the increase in interest rates means that banks charge more for loans, and also are able to boost depositors payouts, even a minor increase in key policy rates might result in millions of dollars in more revenue for them in the short run.
Higher interest rates often indicate economic slowdown, which might trigger recession whether in that country in specific or globally.
On the other hand, this impacts consumers who are applying for loans/mortgages, as higher interest rates have to be incurred on their financial commitments.
In some other cases this might limit them from taking out a loan due to their credit risk scoring.
Digging deeper in monetary correlations, it is noticed that as interest rates climb, the value of banks' bond holdings declines.
Bonds and interest rates have an inverse connection, which explains why this is the case.
The interest yield that bonds offer often competes with the interest rates, making them correlated to a certain extent.
For that reason, and in order to maintain their attractiveness, and since fixed-rate bond issuers are unable to raise their rates to the same level as newly issued bonds.
The only option to boost competition and draw-in new investors is, then, to lower the bond's price.
Figure 2: Source: Thomson Reuters
As seen in Figure 2, when BAC’s financials are compared to its peers, we noticed that its EPS for the 2nd quarter of 2022 was not as significantly impacted as the others.
When compared to the previous quarter, BAC’s EPS moved only by -6.07%, whereas its peers' average change in earnings per share decreased by almost -20% .
Next Quarter’s earnings estimate has a high probability of also decreasing, in case the federal reserve maintains their aggressive monetary approach
Figure 3: Source: Thomson Reuters
Based on numerous surveys conducted by Thomson Reuters, we can conclude from Figure 3, that sixteen analysts out of twenty-eight recommend a buy on the stock of Bank Of America, whereas three recommend a strong buy on the stock, and nine of them recommend a hold if you already own the stock.
From this data, we can see that none of the analysts at Reuters recommends a sell, from which we can conclude that none of the analysts think the stock will go down, however, this also depends on the economic cycle and monetary approach.
Figure 4: Source: Thomson Reuters
Despite the 6% decrease in the quarterly earnings for Bank Of America, it is still considered to be in the safe zone, when compared to its previous quarterly performances.
Figure 5: Source: TradingView, Bank Of America 4hr Time Frame
As seen in Figure 5, the price of the stock broke above the 50 simple moving average, also breaking the 50 RSI level.
MACD also broke the 0 level , however, the price is currently being blocked by the 100 SMA on the 4-hour time frame.
In more news, Alastair Borthwick, the chief financial officer of Bank of America (BAC), said on Monday that the company has put aside around $200 million for a regulatory situation involving the improper use of personal phones. Borthwick also predicted that the issue will be resolved quickly.
The issue mainly stems from employees using their mobile devices at work which has made the SEC look into them to ensure that the Wall Street banks are following the rule.
This will impact the bank’s expenses, however it will not be a revenue generator for the bank.
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