Bank Of America Q2 Preview: Weak NII Could Weigh On EPS

Barclays has cut its second-quarter EPS estimate on Bank of America Corp BAC by $0.03 to $0.34 as it expects an $800 million FAS 91 drag on NII.

"Our 2Q16 EPS estimate is $0.02 below consensus of $0.36. Investors' focus this quarter will likely be on its interest rate exposure, efficiency ratio, and capital markets commentary post EU referendum results," analyst Jason Goldberg wrote in a note.

In addition, the analyst expects BAC to record a $250 million legal accrual and $225 million securities gains. Goldberg also sees some drag from derivative marks, as some of the counterparty CDS spreads widened toward the end of the quarter.

On a sequential basis, the analyst expects higher net interest income (+2 percent) helped by higher net interest margin (+2bps on lower FAS 91 drag) amid a modest expansion in balance sheet on growth in mortgage and better capital market-related results.

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Bank of America will report its second quarter results on July 18.

What To Watch

According to Goldberg, following are the key factors to watch:

1. "Markets revenues: impact of the U.K. decision to leave E.U. adds uncertainty"
2. "Net interest income: FAS 91 drives volatility, core NIM/NII outlook as rates under pressure"
3. "Mortgage: results should benefit from falling mortgage rates"
4. "Expenses: new levers may be needed if rates stay lower for longer"
5. "Credit costs: reserve releases appear to be at an end."

At the time of writing, shares of Bank of America rose 1.38 percent to $13.19 on the day. Goldberg has an Equal Weight rating and $19 price target on the stock.