How Will Wednesday's Bank of America Earnings Look?

On Wednesday, Bank of America (BAC 0.08%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way you'll be less likely to make an uninformed, knee-jerk decision.

Many people continue to associate Bank of America with the problems it faced before and during the financial crisis. But over the past four years, the big-bank Dow (^DJI -0.00%) component has made huge strides toward bringing its business back from near-oblivion, selling off noncore assets, raising capital, and improving its balance sheet, all the while earning the praise of investors. But now that the hard work is done, will B of A be able to keep moving forward and regain its full glory? Let's take an early look at what's been happening with Bank of America over the past quarter and what we're likely to see in its quarterly report.

Stats on Bank of America

Source: Yahoo! Finance.

Can you bank on B of A's earnings this quarter?
Over the past few months, analysts have held their ground on their calls for Bank of America's earnings. Their estimates for the just-ended quarter have remained unchanged, and they've raised their call for the full 2013 year by a penny per share. But after more than doubling last year, B of A's shares have been largely stagnant, gaining less than 2% since early January.

As with other banks, the big news for Bank of America involved the Federal Reserve stress tests, which the bank passed. B of A made substantial progress on its capital ratios, besting its year-ago performance by more than a percentage point. Although B of A shocked some investors by not asking for a dividend increase, it nevertheless got permission to implement a $5 billion share buyback over the next year.

But B of A faces plenty of potential challenges. First and foremost is the fact that under the stress tests, the bank was the worst performer in terms of the size of its theoretical loss. With potential losses of $51.8 billion, it's clear that B of A still represents a systemic risk to the world financial system.

Moreover, as interest rates start to hit bottom and even post modest rises, B of A could lose some of its mortgage-lending business. Wells Fargo (WFC -0.38%) and JPMorgan Chase (JPM 0.04%) have done a better job of underwriting home loans than Bank of America, with Wells doing $125 billion in home loan business during the fourth quarter of 2012 and JPMorgan topping the $50 billion mark. But much of that activity has come from refinancing, while under a higher-rate environment, it will be essential for all three banks to turn toward new-purchase mortgage loans for growth.

Bank of America has also boosted its auto loan exposure, along with Wells Fargo. By itself, that's not a concern, as they've mostly kept to the prime side of the market. But with rumblings about subprime lending starting to emerge in the industry, the last thing B of A needs is to find itself in the middle of another toxic-asset crisis.

In Bank of America's earnings report, watch for news on the progress of the company's big plan to renovate some of its banking locations into so-called "superbranches." The combination of high technology and luxurious surroundings could boost business -- or it could simply come off as a sign of largesse that taxpayers will see as coming at their expense.

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