Is Bank of America's Stock a Buy Ahead of Its Q3 Earnings Report on Oct. 14?

Bank of America (NYSE:BAC), the second-largest bank in the U.S. by assets, will report its third-quarter earnings results on Wednesday, Oct. 14, before the market opens. Management, led by CEO Brian Moynihan, will then host a live conference call with Wall Street analysts.

Banks had been benefiting from market rotation earlier this year, but have come under pressure more recently due to soaring bond yields, which increase funding costs and can weigh on loan growth and credit quality.

Banks, including Bank of America, are now widely underperforming the broader market this year. Is Bank of America stock a buy ahead of its third-quarter earnings report?

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Likely will come down to Net Interest Income

Heading into third-quarter results, Bank of America has lowered expectations for some of its businesses, including investment banking and trading.

At a conference in mid-September, Moynihan told analysts that investment banking fees could be down 10% year over year, while trading revenue may come in flat.

"What we're seeing is the market generally in investment banking is down 10%," said Moynihan, referencing data from Dealogic, according to CNBC. "We're not as well positioned in some of the businesses that have more activity, so we'll be down probably a bit more than that."

So this will likely put net interest income (NII) into focus. NII is the spread revenue that banks earn between what they pay on interest-bearing liabilities, such as deposits, and what they accrue on interest-earning assets, such as loans. It's a key revenue driver for most banks.

On the second-quarter earnings call, Bank of America's CFO Alastair Borthwick told analysts to expect full-year NII to be toward the upper end of its previous guidance of 6% to 8% annual growth.

Borthwick said that's based on modest loan and deposit growth and one rate hike in 2026. However, there's already been one rate hike, and there still could be another.

Bank of America is asset-sensitive, meaning NII should benefit in a rising-rate environment because assets will reprice faster than liabilities, especially its large, low-cost deposit base, which should see a more modest increase in deposit pricing.

Bank of America is known for having one of the strongest, if not the strongest, deposit bases from a funding perspective, meaning it tends to have a more stable, lower-cost deposit base than its peers.

How funding costs are impacted by soaring bond yields will be very important for Bank of America's NII guidance and how investors treat the stock.

Is Bank of America a buy ahead of earnings?

Trying to make a call on a stock before any near-term event is difficult, as one can never know how the market will interpret an earnings report.

Given that management has set a lower bar for investment banking and trading, I think the focus will be on the NII guide. If the bank can maintain or even raise its guidance, then the stock should react well.

Investors will also be razor-focused on credit quality, which has been quite benign. Any significant deterioration could send the stock lower.

Long term, however, I would still rate Bank of America a buy ahead of earnings. The company still has significant scale in many different banking businesses that will be hard to replicate.

The sell-off over the past month has also brought down the valuation and made the stock more attractive in the long term.

Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.