Expectations Rise for Bank of America and Citigroup Earnings

Optimistic Investor Sentiment in the Financial Sector

As earnings season arrives, investors are expressing a sense of cautious optimism, especially in the financial sector. The dynamics in the market have shifted dramatically over the past months, leading to subdued expectations among analysts and investors alike.

Bank of America Earnings Outlook

Bank of America (NYSE: BAC) is gearing up to announce its earnings for the third quarter of 2024 soon. Anticipated estimates suggest earnings per share (EPS) of $0.77 and net revenues of $28.3 billion, which would highlight a year-over-year decline of about 14%. Notably, revenue growth is projected to be flat.

Expectations around Bank of America have been muted, reflecting the tough comparisons this quarter against the previous year's performance. This can sometimes create a favorable scenario for stock performance, particularly in a bullish equity market.

A noteworthy sign for BAC is the resilience it has shown despite Berkshire Hathaway’s decision to pare down its ownership in the bank. Reports indicate that Buffett has now reduced his stake to below 10% of outstanding shares, yet BAC appears to be stabilizing.

Two central concerns have overshadowed Bank of America in recent years: a liability-sensitive balance sheet and challenges in managing expenses effectively. A liability-sensitive balance sheet indicates that BAC’s liabilities have adjusted more quickly than its assets, creating challenges during times of increasing Fed funds rates. Demand for enhanced expense control has also been a consistent call from the sell-side analysts.

Performance and Valuation Analysis

For the entirety of 2024, Bank of America is expecting modest improvements, predicting 1% revenue growth alongside a 6% EPS decline. However, projections for 2025 through 2027 suggest a more favorable outlook, forecasting a 5% revenue growth and EPS growth ranging between 13% and 15%.

Currently, BAC's stock trades at approximately $42 per share, representing a price-to-earnings (PE) ratio of 13 times the expected EPS for 2024 of $3.21. Given BAC's three-year average PE of 12, anticipated EPS growth is projected at an average of 7%.

Trading at 1.2 times book value and 1.7 times tangible book value, Bank of America's valuation is more modest when compared to JPMorgan, yet it trades at a higher multiple than Citigroup (NYSE: C), which is set to follow this earnings preview.

Bank of America reported its stock peaked in early 2022, hitting $50 per share. If market conditions turn favorable for financial stocks, it could potentially reach those heights again.

Citigroup Earnings Expectations

As Citigroup prepares to unveil its financial results for the third quarter of 2024, analysts are predicting an EPS of $1.31 alongside net revenues of $19.8 billion, reflecting year-over-year declines of 14% and 1%, respectively.

In the preceding quarter of 2024, Citigroup reported a net revenue increase of 3% and an EPS increase of 14%. CEO Jane Fraser is working towards reducing the workforce, with Citigroup's total headcount currently at 229,000 - a decrease from a peak of 240,000 but still higher than the 220,000 noted in December 2020. The outlook on future headcount reductions remains mixed, with some indications that further cuts may be forthcoming.

In terms of regional performance, Citigroup has lagged significantly over both the past 14 and 4-year periods, although operational improvements have begun under Fraser's leadership. Citigroup’s ROTCE stands lower than Bank of America but is inferior to JPMorgan’s, while its book value positions it as the most affordable among larger banks.

As of mid-2024, Citigroup’s book value was recorded at $99.70 per share, with a tangible book value of $87.50, translating to trades at 0.66 times book value and 0.76 times tangible book value.

Looking Ahead

Many major banks haven’t reached new all-time highs since 2021, primarily due to the effects of Fed rate hikes on balance sheets. Should BAC break through $55, it would mark a new high since 2006. Similarly, if Citi exceeds $80, it too would establish a new post-2008 peak.

Despite JPMorgan emerging as the leading performer, BAC and Citi could provide valuable defensive plays in financial services portfolios. Both banks have voiced the need for improved cost efficiencies in their 2024 and 2025 outlooks, a management area they can control to enhance EPS growth.

EPS growth for both institutions is expected to gain momentum in 2025 and 2026 compared to 2024, although we will need to await further clarification in January 2025.

Indeed, BAC and Citi might show relative stability in a market correction scenario where declines could reach 15% to 20%. Enhancements in dividends have been embraced, with Citigroup recently offering a yield of 3.25%.

The current landscape is nearly optimal for larger banking institutions. Solid consumer credit activity, moderate corporate loan growth, and robust net interest income due to rate hikes, combined with resilient capital market activity, particularly in bonds, indicates that these banks are well positioned. The main challenge remains the absence of a thriving IPO market, which has not performed as well as expected despite the robust performance of U.S. equity markets.

Frequently Asked Questions

What do analysts expect from Bank of America's upcoming earnings?

Analysts forecast earnings per share of $0.77 and net revenues of $28.3 billion for Bank of America.

How is Citigroup positioned compared to its peers?

Citigroup has been seen as a laggard in performance but is beginning to make operational improvements under CEO Jane Fraser.

What are the projected long-term expectations for BAC and C?

Bank of America is expected to see revenue growth of 5% and EPS growth between 13% and 15% from 2025 to 2027.

How have recent market conditions affected the banking sector?

Banking stocks have faced challenges, but the current environment is favorable, suggesting that both BAC and C could perform better than in recent years.

What dividend changes have occurred recently with BAC and C?

Both Bank of America and Citigroup recently increased their dividends, with Citigroup's yield currently at 3.25%.

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