Bank of America Shareholders Running For The Exits

Bank of America Corp. (BAC) is trading lower by nearly 4% in Wednesday’s U.S. session after beating Q3 2020 estimates by a penny and missing the mark on revenue. The banking giant earned $0.51 per-share, marking a 32% decline compared to the same quarter in 2019. Revenue fell 11.6% year-over-year to $20.3 billion while the company increased provisions for credit losses by $1.4 billion to address a 5% increase on loans that now stand at $319 billion.

U.S. Banks Selling Off

Major U.S. commercial banks are getting sold this week, despite seemingly upbeat third quarter earnings reports. Citigroup Inc. (C) has posted the largest losses so far, dropping more than 5% despite beating profit estimates by $0.53 on Tuesday.  Even sector leader JPMorgan Chase and Co. (JPM) is losing ground, down by more than 1%. The broad-based sell-the-news reaction suggests these stocks were over-valued, even though they’ve been exceptionally weak 2020 performers.

Cautious executive commentary following the releases has added to deteriorating sentiment. Chase warned that it will take another round of government stimulus to make them more comfortable about current reserves set aside for a downturn that could trigger a wave of defaults. Citigroup expressed caution as well, stating it now expects a “somewhat more muted and slower recovery in both unemployment and GDP through 2022.”

Wall Street And Technical Outlook

Wall Street currently views Bank of America as a ‘Strong Buy’ based upon 5 ‘Buy’ and 1 ‘Hold’ recommendation. No analysts are recommending that shareholders sell positions and move to the sidelines at this time. Price targets currently range from a low of $23 to a Street-high $37 while the stock is now trading at the low target. This humble placement after earnings suggests that price targets will need to come down from current levels.

Bank of America lifted to an 11-year high in December 2019 and rolled over in February 2020, breaking multiple support levels before bottoming out at a 3-year low in the upper teens. It’s now failed 4 attempts to remount the 200-day EMA, which was broken on heavy volume in the first quarter. Relative strength readings are deteriorating, predicting the stock will eventually test and potentially break the first quarter low.

For a look at all of today’s economic events, check out our economic calendar.

Buffett Buyers Lift Bank Of America Shares To 2-Month High

Bank of America Corp. (BAC) is trading near a 2-month high after legendary investor Warren Buffett and his Berkshire Hathaway Inc. (BRK/A) purchased more than 20 million shares. The transactions, dated between July 28 and July 30, place a $520 million bet that U.S. bank chains will recover from adverse economic conditions in the next one or two years. The high stakes wager looks dangerous from an outsider’s viewpoint, given high odds for a protracted recession in a low interest rate environment that weakens industry profits.

Bank Of America Plagued By Industry Headwinds

The commercial banking sector has lagged major indices since the 2008 economic collapse, undermined by weak investment, low interest rates, and the funneling of corporate profits into stock buybacks, rather than capital spending that generates consistent loan income. Bank of America has underperformed both broad benchmarks and industry peers during this period and is now trading at October 2008 price levels.

The stock sold off after July earnings, despite beating top and bottom line Q2 2020 estimates. CEO Brian Moynihan set a somber tone during the conference call, warning that “economic predictions have been revised, and the forward path has deteriorated from last quarter. Baseline projections now extend the length of the recessionary environment deep into 2022. We provide substantial additional reserves for expected future credit losses this quarter to reflect that, and that has impacted our earnings.”

Wall Street And Technical Outlook

Wall Street has issued no upgrades or downgrades since the purchase, maintaining a ‘Moderate Buy’ consensus based upon 5 ‘Buy’, 5 ‘Hold’, and 1 ‘Sell’ recommendation. Analyst caution makes sense, given adverse economic conditions as well as Buffett recently taking a $9.8 billion write down on a losing Precision Castparts bet. Price targets currently range from a low of $23 to a street-high $38 while the stock is now trading about $1 below the $27.50 median target.

Technical speaking, Bank of America remains stuck in a major downtrend after breaking the 200-day EMA on heavy volume in February 2020. It failed a June test at this resistance level while the uptick into August has lifted price back to this inflection point. Unfortunately, even stronger resistance is situated less than three points above this barrier, lowering odds the stock will rally back to the February 2020 high until 2021, at the earliest.

Bank of America Struggling To Hold Above March Low

Bank of America Corp. (BAC) sold off despite beating Q2 2020 estimates last week and is now trading just 6 points or so above March’s 3-year low. Revenue fell 3.5% year-over-year to $22.3 billion while credit loss provisions rose to $5.1 billion, which includes a $4.0 billion reserve build for future bad loans as a result of the COVID-19 pandemic. Net interest income fell 11% due to lower rates that have made it harder for commercial banks to book consistent profits.

Bank Of America Sector Headwinds

Rivals haven’t fared much better during earnings season, with shareholders walking away from banking stocks, due to growing fears about a protracted recession that dampens business activity for months to come. 2019’s historic drop in bond yields stoked growing sector headwinds, which have escalated to hurricane force due to the Federal Reserve’s multi-trillion dollar stimulus program, which has raised the specter of negative interest rates.

DA Davidson analyst David Konrad highlighted banking industry challenges when he downgraded Bank of America earlier this month, lowering his price target from $27 to $25. He noted the company’s strong balance sheet and comparatively low risk profile but warned those risk constraints could undermine quarterly results. He also stressed collapsing LIBOR spreads in the adverse rate environment, negatively impacting the sector’s net interest income outlook.

Wall Street And Technical Outlook

Wall Street consensus currently rates the stock as a ‘Moderate buy’, computed from 5 ‘Buy’ and 5 ‘Hold’ recommendations. One analyst recommends that shareholders close out positions at this time. Price targets range from a low of $21 to a street high $41 while the stock is now trading less than $4 under the median $ 27.70 target.  The proximity of current price to the median and lack of bullish catalysts suggests limited upside potential.

Bank of America broke out above 2018 resistance in the fourth quarter of 2019 and topped out at a 12-year high in the mid-30s in December. It’s been all downhill since that time, failing the breakout during the first quarter rout. The stock has booked limited upside in the last 4 months while accumulation has barely budged. None of this bodes well for the technical outlook, raising odds the stock will test the downtrend low in coming months.

 

European Markets slip Ahead of the ECB

China Q2 GDP showed a 11.5% rebound, more than reversing the -10% fall in output seen in Q1, suggesting a nice v-shaped recovery in economic activity. The annualised number recovered to 3.2% from -6.8%.

If you had any doubts about the accuracy of China’s GDP numbers before this morning’s announcement, these figures only serve to reinforce that scepticism, as they appear to completely diverge from most of the data that has come out of China since April. In terms of the trade data, both imports and exports have been weak, while retail sales have also struggled.

Retail sales have declined in every month, by -7.5%, -2.8% and -1.8% in June, and with the Chinese consumer now making up around half of China’s economic output, I would suggest these numbers in no way reflect the real picture regarding China’s economy at this moment.

After yesterday’s strong session, markets here in Europe have taken their cues from the weakness in Asia markets and opened lower, as some of the vaccine optimism of yesterday starts to taper off.

On the results front Ladbrokes and Coral owner GVC Holdings have fallen back after reporting a decline in group net gaming revenue of 11%, in the first half of the year, largely down to the suspension of sporting events. The biggest falls in like for like revenues were in the UK and Europe with sharp drops of 86% and 90% in Q2, largely down to the wholesale closure of stores, though with the re-opening of shops in June these numbers are now starting to pick up again.

On the plus side, helping offset that weakness online gaming revenue rose, rose 19% in H1, with a 22% rise in Q2, with a strong performance in Australia. Management said they expect first half earnings to be within the range of £340m-£350m, while CEO Keith Alexander is set to retire and will be replaced by Shay Segev.

Energy provider SSE has said that coronavirus impacts on operating profits are in line with expectations, with profit expected to be in the range of £150m and £250m, though this could well change. The company has said it still expects to pay an interim dividend of 24.4p in November, in line with its 5-year plan to 2022/23.

In terms of renewable output, this came in below plan, but was still higher than the same period a year ago.

Purplebricks shares are higher after announcing the sale of its Canadian business for C$60.5m to Desjardins Group

Aviva announced that it has completed the sale of a 76% stake in Friends Provident to RL360 for £259m.

Royal Bank of Scotland also announced that from 22nd July 2020 it would henceforth be known as NatWest Group, subject to approval as it strives to draw a line under the toxicity of the RBS brand. This toxicity has dogged the bank since the 2008 bailout, along with the various scandals, around rate fixing, PPI and the GRG business, that have swirled around the bank since then. Investors will certainly be hoping so given the current share price performance, and hope that the change in name isn’t akin to putting lipstick on a pig.

Consumer credit ratings company Experian latest Q1 numbers have shown a large fall in revenue growth across all of its regions with the exception of North America, and which helped mitigate a lot of the weakness elsewhere.

The euro is slightly softer ahead of this afternoon’s ECB rate decision, which is expected to see no change in policy. At its last meeting the European Central Bank hiked its pandemic emergency purchase program by another €600bn to €1.35trn, with the time horizon pushed into the middle of June 2021. The ECB still needs to formally respond to the challenge of the German court irrespective of its insistence it is covered under the jurisdiction of the European Court.

Even where Germany is concerned optics are important, particularly if the ECB wants to be seen as a responsible arbiter of the economy across all of Europe, and the PEPP still remains vulnerable to a legal challenge, due to its difference with the previous program. The bank could also indicate if it has any plans to start buying the bonds of so called “fallen angels”. These are the bonds of companies that were investment grade, but have fallen into “junk” status as a result of the pandemic.

This morning’s UK unemployment numbers don’t tell us anything we don’t already know. The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 650k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

US markets look set to take their cues from the weakness seen here in European markets, with the main attention set to be on the latest June retail sales and weekly jobless claims numbers.

Retail sales are expected to rise 5% in June, some way below the 17.7% rebound seen in the May numbers which reversed a -14.7% fall in April. The strength expected in the June number seems optimistic when set aside the employment numbers, and the 13m people still not working since March. This suggests that this number could well be highly fluid and while a lot of US workers have managed to get their furlough payments, it doesn’t necessarily follow that they will spend it.

Weekly jobless claims are still expected to be above the 1m mark, with a slight reduction expected to 1.25m from 1.31m. Continuing claims are expected to fall further to 17.5m, however these could start to edge higher in the coming weeks as US states issue orders to reclose businesses in the wake of the recent surge in coronavirus cases.

Twitter shares lost ground lost night after the bell as it became apparent that the accounts of high profit individuals like Elon Musk, Warren Buffet and former US President Barack Obama were hacked by a bitcoin scammer. All verified accounts were shut down as a result as Twitter scrambled to get on top of the problem. It’s difficult not to overstate how embarrassing this is for Twitter given that the blue tick offers certainty that the user of the account is the person they claim to be. To have them hacked is hugely embarrassing, and undermines the integrity of the whole blue tick process.

American Airlines shares are also likely to be in focus after the company announced that 25,000 jobs could be at risk, when the furlough scheme runs its course. United Airlines has already said it could cut up to 36,000 people, up to 45% of its workforce.

Netflix Q2 earnings are also due after the bell with high expectations that the company can build on its blow out Q1 subscriber numbers of 15.8m. Q2 is expected to see 7m new subscribers added.

Bank of America is also expected to post its latest Q2 numbers with the main attention on how much extra provision for bad loans the bank will add to its Q1 numbers.

Dow Jones is expected to open 160 points lower at 26,710

S&P500 is expected to open 18 points lower at 3,208

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)