Bank of America Earnings Preview: Q408

Bank of America [[BAC]] is scheduled to report fourth quarter 2008 results before the market opens on Tuesday, January 20. Based on our analysis, we at are expecting BAC to report disappointing results that fail to meet Wall Street’s expectations.


Analyst Expectations

We are forecasting revenues of $20.37 billion and EPS of ($.06). The current analyst consensus calls for revenues of $20.72 billion and $.08 EPS.


Major financial institutions such as Bank of America are going to continue to suffer in this recessionary environment. Consumers are in the midst of a severe credit crunch that is being exacerbated by falling housing prices and rising foreclosures. Yesterday,  RealtyTrac released a report citing an 81% increase in foreclosures in 2008.


While the acquisition of Merrill Lynch seemed like phenomenal coup for BAC, the costs of integrating and closing that deal seem to continue escalating. The Wall Street Journal reported yesterday that BAC is in discussions with the Treasury department to provide additional capital to complete the deal. The need for additional capital after already receiving $25 billion in Federal funds shows how far we still have to go to get out of this crisis.


We continue to believe that the Merrill Lynch acquisition will prove to be a tremendous strategic asset for Bank of America in the long term. However, it is clear that the company will continue to face severe challenges in the coming months. We would not be surprised for the company to cut its dividend again in 2009.


Share Performance

Bank of America’s shares are fallen over 42% since the beginning of the year. Following on top of last year’s 66% drop that greatly underperformed the 34% drop in the Dow Jones index.



Shares are now trading at only 4.6x consensus 2009 EPS estimates. While this would appear to represent an attractive valuation level, the reality is that Wall Street almost certainly will be reducing their 2009 estimates. In addition, the markets will probably further penalize BAC should they cut their dividend again. However, should the price fall much further, the risk-reward tradeoff will become attractive to long –term investors.


Recommendation: Hold with a $8 price target.


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