Bank of America Earnings: What to Expect

NEW YORK ( TheStreet) -- Bank of America ( BAC) investors' hopes of a stock price rally may rest on fixed income trading when the company reports fourth quarter earnings on Friday.

That's because credit metrics have improved nearly across the board for banks, leaving little doubt that Bank of America will show similar strength, analysts say.

Mortgage banking income, especially for Wells Fargo ( WFC) has also been strong, according to Sanford Bernstein analyst Anthony Polini. That's assuming one discounts a $3 billion settlement with government sponsored entities (GSEs) Fannie Mae ( FNMA.OB)and Freddie Mac ( FMCC.OB) over mortgage "putbacks," and a $2 billion "goodwill impairment charge" related to Bank of America's mortgage business, both of which were previously announced by the bank.

But fixed income results, while generally weak, have been less predictable, Polini says. He argues Goldman Sachs ( GS) and Citigroup ( C) which reported earlier this week, both showed weaker than expected results in this area, while JPMorgan Chase ( JPM)'s debt traders proved somewhat more agile in navigating a sudden rise in 10-year Treasury rates in mid-December.

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"That could go either way from what we've seen from the other large companies. In that type of environment you could make a killing," Polini says. "You can also lose some money when you get a surprise spike in the 10-year that doesn't stop. Even though you tend to take these trades for customers, sometimes you hold onto them for a day or two and get caught in a position," Polini says.

Sandler O'Neill analyst Jeff Harte says a positive result in Bank of America's trading unit could drive the stock higher.

"If their trading revenues prove stronger than, say, Goldman's and JPMorgan's, the stock will be very strong. I'm not expecting that, but that's probably what it would take for the stock to be really strong," Harte says. "The credit getting better isn't going to cause BofA's stock to rally on Friday. I think that BofA is going to have a good 2011 as a stock, more so than it's going to rally."

Analysts surveyed by Thomson Reuters are looking for 15 cents per share, compared to a 60 cents loss a year ago and a 77 cents loss in the last quarter. Estimates vary widely, however, depending upon what numbers analysts are excluding or including in their models, Harte says. In other words, there may be plenty of "noise" that may make it difficult to get an immediate picture of the strength of different businesses at the bank.

"Part of the trouble is whether you include the mortgage goodwill writedown, whether you include the GSE settlement. There's enough moving parts it's going to be tough to say did they meet or miss expectations because everyone's got kind of different expectations. The accounting treatment and the EPS number people are looking for are going to be different," says Harte.

-- Written by Dan Freed in New York.

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