BAC-WT - Bank of America Warrants

[racemize]

I agree with the differences between the fed and bac this year, but the fed itself shows a 20 billion drop from its tests last year, which seems pretty strange.  In other words, why wouldn't the fed have made the same (or worse) assumptions last year? 

[kevin4u2]

Any thoughts on why the PPNR was so much lower this year than last (down from ~40 billion to ~20 billion)?  and why it is different from BAC's own stress results from this year?

 

Discussed some in this article:

http://www.fool.com/investing/general/2013/03/08/why-bank-of-americas-shares-are-struggling-today.aspx

 

And second, B of A's internal evaluation turned out a considerably different result. While the Fed estimated its pre-provision net revenue to be only $24.1 billion over the relevant time period, B of A's estimate came in at $38.5 billion. The net effect was an increase of $8 billion in the bank's nine-quarter earnings. Suffice it to say, this still resulted in a loss, but the loss was considerably smaller than that estimated by the Fed.

 

Their expenses are projected to go down by $9 billion on a run rate basis this year compared to 2012. I can understand why Fed would not count on those savings while BAC would be inclined to include these savings in their estimates. This does not account for the entire difference but I think would account for the major chunk.

 

Vinod

 

In the footnote it says,

 

¹ Pre-provision net revenue includes losses from operational-risk events, mortgage put-back expenses, and OREO costs.

 

I believe it a combination of the FED not giving credit for the expense reductions (as mentioned above) but also greater mortgage put-back expenses.  This good news is that despite the very conservative assumtions made here by the FED, BAC will do fine.

 

They have the reached the capital levels to sustain a sever downturn.  The capital plan will be approved and like the others I see somewhere around 5-7 billion being returned.  There is no more need for BAC to continue to stockpile capital.  I do expect them to remain conservative on the payouts just incase they have some negative legal issues arise. 

 

That said, if expenses come down faster due to the improvements on the housing side, look for another increase at the mid cycle test which they have to submit by July 5th.   

[xazp]

Here's a handy table showing all the big banks, what they estimated, and what the Fed estimated.  As you can see, BAC is off, but others are off further.  (C actually is the closest to fed numbers).  Golden boy JPM is pretty far off, WFC is also further off than BAC.  In fact the most accurate estimates on that chart are C then BAC (the "problem kids") while the "awesome" banks are the worst. 

 

http://ftalphaville.ft.com/files/2013/03/StressTestComp.png

 

 

IIRC the stress test was before the big Fannie settlement, so I'd think if the stress test were run "today" you'd have better results already.  Who knows what they were estimating as a worst case. 

 

Do you have more info on the mid-cycle test?  Can you post it?  Because I was hoping that C for example would increase their request mid-year, since they so far lowballed theirs. 

 

 

In the footnote it says,

 

¹ Pre-provision net revenue includes losses from operational-risk events, mortgage put-back expenses, and OREO costs.

 

I believe it a combination of the FED not giving credit for the expense reductions (as mentioned above) but also greater mortgage put-back expenses.  This good news is that despite the very conservative assumtions made here by the FED, BAC will do fine.

 

They have the reached the capital levels to sustain a sever downturn.  The capital plan will be approved and like the others I see somewhere around 5-7 billion being returned.  There is no more need for BAC to continue to stockpile capital.  I do expect them to remain conservative on the payouts just incase they have some negative legal issues arise. 

 

That said, if expenses come down faster due to the improvements on the housing side, look for another increase at the mid cycle test which they have to submit by July 5th. 

[Parsad]

Bank of America Was Actually More Pessimistic Than The Fed:

 

http://www.cnbc.com/id/100539162

 

Cheers!

[onyx1]

ROA comparison updated for most recent quarter (BAC/WFC/JPM/USB):

 

[buylowersellhigh]

What is driving the low ROA for BofA?  Is it simply the loss reserves, etc. masking the net income?

 

And why is ROA a better metric for banks than book value?  Did Buffett explain his logic?

[Liberty]

ROA comparison updated for most recent quarter (BAC/WFC/JPM/USB):

 

Thanks Onyx, it's very nice to be able to see it like that.

[ERICOPOLY]

What is driving the low ROA for BofA?  Is it simply the loss reserves, etc. masking the net income?

 

And why is ROA a better metric for banks than book value?  Did Buffett explain his logic?

 

They are presently at about 8% ROE if you back out the expenses that are meant to be runoff (according to management) within 2.5 years.

 

[kevin4u2]

 

Do you have more info on the mid-cycle test?  Can you post it?  Because I was hoping that C for example would increase their request mid-year, since they so far lowballed theirs. 

 

 

This is on page 5 of the Federal Reserve Stress Test Report :

 

As required by the Dodd-Frank Act, the Federal Reserve’s stress test rules require covered companies to conduct two company-run stress tests each year. In conducting the “annual” test, a covered company uses data as of September 30 and reports its stress test results to the Federal Reserve by January 5. In addition, a covered company must conduct a “midcycle” test and report the results to the Federal Reserve by July 5. The Dodd-Frank Act stress test rules align the timing of annual company-run stress tests with the annual supervisory stress tests of covered companies.

 

It is also interesting to note that BAC's capital levels are artificially punished under the stress test result because of the increased DTA's (which count against capital).  This is from page 6 of the BAC presentation of their stress test results:

 

Due to the impact of the hypothetical pre-tax losses, the deferred tax asset (“DTA”) increased resulting in higher disallowed DTAs which reduced capital and capital ratios.

[xazp]

They are presently at about 8% ROE if you back out the expenses that are meant to be runoff (according to management) within 2.5 years.  >>

 

Did you ever figure out if the cost-cuts also entail revenue cuts?  Clearly some of them will (the "new BAC"), but I thought you also raised the good point that

even LAS has some revenues, and they might also go down when everything is wound down to a steady state.  Or is that already factored in to your ROE number?

 

What is driving the low ROA for BofA?  Is it simply the loss reserves, etc. masking the net income?

 

And why is ROA a better metric for banks than book value?  Did Buffett explain his logic?

 

They are presently at about 8% ROE if you back out the expenses that are meant to be runoff (according to management) within 2.5 years.

[ERICOPOLY]

They are presently at about 8% ROE if you back out the expenses that are meant to be runoff (according to management) within 2.5 years.  >>

 

Did you ever figure out if the cost-cuts also entail revenue cuts?  Clearly some of them will (the "new BAC"), but I thought you also raised the good point that

even LAS has some revenues, and they might also go down when everything is wound down to a steady state.  Or is that already factored in to your ROE number?

 

What is driving the low ROA for BofA?  Is it simply the loss reserves, etc. masking the net income?

 

And why is ROA a better metric for banks than book value?  Did Buffett explain his logic?

 

They are presently at about 8% ROE if you back out the expenses that are meant to be runoff (according to management) within 2.5 years.

 

Here is the extent of my reasoning, from when the Q4 earnings were posted.  Critique and revise please if you think the earnings are actually lower or higher:

 

 

At the start of the Q&A they indicated that they are currently saving $900 million per quarter from New BAC.  They are 45% done with that phase-in of expense reduction.

 

Had they been 100% complete, there would have been $1.1b less expense in the quarter, or 6.5 cents after taxes (35% tax rate).

 

Add that to the 21 cents of core earnings and it's 27.5 cents for the quarter (after-tax).

 

We can hope to cut another $2.5b quarter expense from LAS runoff but I believe we lose $200m of quarterly servicing revenue from the MSR sales.  After taxes (35% tax rate) I believe we pick up another 13.5 cents per share from LAS.

 

So all put together, it's 41 cents after-tax for the quarter if you were to close your eyes and pretend that the expenses were already run off.  That comes out to $1.64 annualized.

 

This is lower return on tangible equity than the 13% lower-bound that Moynihan talked about by 2015 in the current rate environment.  I think it also benefits from some net reserve releases that may be exhausted by 2015. 

 

Thoughts on where things get better to the 13% to 15% level from here?

[ERICOPOLY]

I suppose the value of that $1.60 number is less than I implied -- it's just what they are doing right now, I had thought, but perhaps it is overvalued by assuming expenses would vanish without any decline in revenue.

 

On the more bright side of things...

 

The terminal value has more to do with earnings in a couple of years and beyond, not right this moment.  So back to that 13% to 15% ROTE guidance by management -- in the current rate environment.  That is probably related to that hiker/backpack analogy that Moynihan talked about where he implies he is now going to move the pace up more in line with rivals. 

[xazp]

Your numbers are fairly close to mine, I have something in that range for post-LAS, post-new-BAC too. 

 

One item that I feel that has been glossed over by everyone is - severance costs.  They are going through one of the largest layoffs in corporate history.  But, they never include any information on severance costs.  It has to be large, no one ever asks, and no one models it.  But for example C spent about $1.3Bn last year in severance and their cost-cutting program is much smaller than BAC's.  So you could find surprise upside there. 

 

I'm more focused on buybacks than you are; their capital levels suggest they could buy 10%+ of the stock in the next two years, which would imply upside to the per-share number you have. 

 

Can you dig out the quote or transcript where they talk about 13-15% ROTE in the current rate environment?  I've heard Moynihan talk about normalized earnings, but usually in the context of more normal rates too. 

 

Thx

 

I suppose the value of that $1.60 number is less than I implied -- it's just what they are doing right now, I had thought, but perhaps it is overvalued by assuming expenses would vanish without any decline in revenue.

 

On the more bright side of things...

 

The terminal value has more to do with earnings in a couple of years and beyond, not right this moment.  So back to that 13% to 15% ROTE guidance by management -- in the current rate environment.  That is probably related to that hiker/backpack analogy that Moynihan talked about where he implies he is now going to move the pace up more in line with rivals.

[ERICOPOLY]

Your numbers are fairly close to mine, I have something in that range for post-LAS, post-new-BAC too. 

 

One item that I feel that has been glossed over by everyone is - severance costs.  They are going through one of the largest layoffs in corporate history.  But, they never include any information on severance costs.  It has to be large, no one ever asks, and no one models it.  But for example C spent about $1.3Bn last year in severance and their cost-cutting program is much smaller than BAC's.  So you could find surprise upside there. 

 

I'm more focused on buybacks than you are; their capital levels suggest they could buy 10%+ of the stock in the next two years, which would imply upside to the per-share number you have. 

 

Can you dig out the quote or transcript where they talk about 13-15% ROTE in the current rate environment?  I've heard Moynihan talk about normalized earnings, but usually in the context of more normal rates too. 

 

Thx

 

I suppose the value of that $1.60 number is less than I implied -- it's just what they are doing right now, I had thought, but perhaps it is overvalued by assuming expenses would vanish without any decline in revenue.

 

On the more bright side of things...

 

The terminal value has more to do with earnings in a couple of years and beyond, not right this moment.  So back to that 13% to 15% ROTE guidance by management -- in the current rate environment.  That is probably related to that hiker/backpack analogy that Moynihan talked about where he implies he is now going to move the pace up more in line with rivals.

 

I posted it on this thread back in either Nov or Dec, but this is one heck of a long thread!  Moynihan was speaking at a financial conference, it was audio only.  They had it up as a webcast on the Bank of America website.

 

Sanjeev I know remembers it.  Maybe he can comment.  I had specified the exact minute for people to advance the webcast to -- so to hear Moynihan utter the words.  However, I don't have the time to read all of this thread for Nov/Dec to find the exact place.

 

[Parsad]

Your numbers are fairly close to mine, I have something in that range for post-LAS, post-new-BAC too. 

 

One item that I feel that has been glossed over by everyone is - severance costs.  They are going through one of the largest layoffs in corporate history.  But, they never include any information on severance costs.  It has to be large, no one ever asks, and no one models it.  But for example C spent about $1.3Bn last year in severance and their cost-cutting program is much smaller than BAC's.  So you could find surprise upside there. 

 

I'm more focused on buybacks than you are; their capital levels suggest they could buy 10%+ of the stock in the next two years, which would imply upside to the per-share number you have. 

 

Can you dig out the quote or transcript where they talk about 13-15% ROTE in the current rate environment?  I've heard Moynihan talk about normalized earnings, but usually in the context of more normal rates too. 

 

Thx

 

I suppose the value of that $1.60 number is less than I implied -- it's just what they are doing right now, I had thought, but perhaps it is overvalued by assuming expenses would vanish without any decline in revenue.

 

On the more bright side of things...

 

The terminal value has more to do with earnings in a couple of years and beyond, not right this moment.  So back to that 13% to 15% ROTE guidance by management -- in the current rate environment.  That is probably related to that hiker/backpack analogy that Moynihan talked about where he implies he is now going to move the pace up more in line with rivals.

 

I posted it on this thread back in either Nov or Dec, but this is one heck of a long thread!  Moynihan was speaking at a financial conference, it was audio only.  They had it up as a webcast on the Bank of America website.

 

Sanjeev I know remembers it.  Maybe he can comment.  I had specified the exact minute for people to advance the webcast to -- so to hear Moynihan utter the words.  However, I don't have the time to read all of this thread for Nov/Dec to find the exact place.

 

Starts around November 14, 2012.  The exact post that Eric makes the comment on is "Reply # 1844" on page 185 of the BAC thread.  Cheers!

[xazp]

I see that I was asking the same question back then. 

 

Both BAC and C should put on investor day meetings to update and clarify their normalized earning targets.

 

I know that at one point, investors were challenging his "normalized' earnings assumptions - it was on a conference call - and he said his previous remarks on ROE/ROA/PPNR included benefits from a better interest rate environment.  I believe it was after the sale of a bunch of assets, so the analyst was asking if the earnings power was still there post-sale. 

 

So if he's switched to saying that 13-15% ROE is in reference to pre-interest-rate-improvements, that would be good news.  I still haven't found the source material where he says that, but I haven't been looking very hard. 

 

Your numbers are fairly close to mine, I have something in that range for post-LAS, post-new-BAC too. 

 

One item that I feel that has been glossed over by everyone is - severance costs.  They are going through one of the largest layoffs in corporate history.  But, they never include any information on severance costs.  It has to be large, no one ever asks, and no one models it.  But for example C spent about $1.3Bn last year in severance and their cost-cutting program is much smaller than BAC's.  So you could find surprise upside there. 

 

I'm more focused on buybacks than you are; their capital levels suggest they could buy 10%+ of the stock in the next two years, which would imply upside to the per-share number you have. 

 

Can you dig out the quote or transcript where they talk about 13-15% ROTE in the current rate environment?  I've heard Moynihan talk about normalized earnings, but usually in the context of more normal rates too. 

 

Thx

 

I suppose the value of that $1.60 number is less than I implied -- it's just what they are doing right now, I had thought, but perhaps it is overvalued by assuming expenses would vanish without any decline in revenue.

 

On the more bright side of things...

 

The terminal value has more to do with earnings in a couple of years and beyond, not right this moment.  So back to that 13% to 15% ROTE guidance by management -- in the current rate environment.  That is probably related to that hiker/backpack analogy that Moynihan talked about where he implies he is now going to move the pace up more in line with rivals.

 

I posted it on this thread back in either Nov or Dec, but this is one heck of a long thread!  Moynihan was speaking at a financial conference, it was audio only.  They had it up as a webcast on the Bank of America website.

 

Sanjeev I know remembers it.  Maybe he can comment.  I had specified the exact minute for people to advance the webcast to -- so to hear Moynihan utter the words.  However, I don't have the time to read all of this thread for Nov/Dec to find the exact place.

 

Starts around November 14, 2012.  The exact post that Eric makes the comment on is "Reply # 1844" on page 185 of the BAC thread.  Cheers!

[Cardboard]

Don't you guys think it is taking too much time for BAC to finally realize some decent profits and ROE?

 

I mean JPM bought WaMu and Bear Stearns during the financial crisis. WaMu wasn't a clean operation lending only to prime customers if you see what I mean. They went bankrupt and they had something like $310 billion in assets vs $190 billion at Countrywide.

 

Then Bear Stearns was up to its eye balls into subprime and mortgages and were the first investment bank to default. Normally first means the weakest or most exposed in the domino. Merrill Lynch turned broke because they were next in line after Lehman along with Morgan Stanley or because their overnight lending facilities were also being cut off.

 

While I understand that Moynihan inherits acquisitions from Lewis and it is not the case at JPM, the "troubled" acquisitions don't look that different. They probably are, but to what extent? Also Lewis, wasn't known to buy garbage (except Countrywide of course), but to be aggressive or to pay too much. Fleet Boston and others were good banks. Price paid could impact capital levels today due to write-offs such as goodwill, but not on-going pre-tax earnings.

 

I still think that BAC represents a solid opportunity due to the low share price and coming profits, but what are they doing so differently at JPM that allowed them to clean the mess so much more quickly? Is it a culture thing? I mean, I see the BAC phase 1 and phase 2 plan, but it just looks like that JPM it at phase 5 or 6.

 

Cardboard

[jay21]

Someone else more knowledgeable than me can give you better answer, but the difference between the acquisition of WaMu and Bear vs. Countrywide and ML was huge. Look at all the litigation coming from Countrywide vs. WaMu.  WaMu probably didn't need to go bankrupt and I think Bear was more of a liquidity crunch. 

 

To give a quick figure:  JPM had 17.5b NPLs at 12/31/2009, BAC had 35.7b

 

Love to hear from others on the topic as well.

[Parsad]

Someone else more knowledgeable than me can give you better answer, but the difference between the acquisition of WaMu and Bear vs. Countrywide and ML was huge. Look at all the litigation coming from Countrywide vs. WaMu.  WaMu probably didn't need to go bankrupt and I think Bear was more of a liquidity crunch. 

 

To give a quick figure:  JPM had 17.5b NPLs at 12/31/2009, BAC had 35.7b

 

Love to hear from others on the topic as well.

 

You cannot compare Wamu and Countrywide.  Countrywide was the largest originator in the United States of rubbish loans.  Why Angelo Mozillo isn't in jail is beyond me? 

 

Wamu basically needed a cash injection to keep it afloat, run off the bad loans and you have essentially some good quality banking assets...but they needed capital to prevent a run and they needed time to runoff the bad loans.  Countrywide had none of that...just poor rubbish loans.  Cheers! 

[Cardboard]

Sure Sanjeev, but bad loans are written off once and you move on, same with lawsuits. Merrill is now profitable and I would guess as much if not more than Bear Stearns. What I struggle with is this apparent bloating that they can't seem to get rid of under SG&A. It wasn't there in the ROA and ROE numbers before the financial crisis. They were quite a bit better than JPM and among the very best even just a couple percentages away from WFC.

 

Is it just Countrywide remaining personel? I doubt it. Is it a lack of knowledge or skill in how to integrate new operations quickly? How did it work so well then before under Lewis? Is there something more sinister like BAC original being much worse than the numbers showed and they are now using Countrywide as a scapegoat? We are 4.5 year into this and counting here.

 

Cardboard

[jay21]

Sure Sanjeev, but bad loans are written off once and you move on, same with lawsuits. Merrill is now profitable and I would guess as much if not more than Bear Stearns. What I struggle with is this apparent bloating that they can't seem to get rid of under SG&A. It wasn't there in the ROA and ROE numbers before the financial crisis. They were quite a bit better than JPM and among the very best even just a couple percentages away from WFC.

 

Is it just Countrywide remaining personel? I doubt it. Is it a lack of knowledge or skill in how to integrate new operations quickly? How did it work so well then before under Lewis? Is there something more sinister like BAC original being much worse than the numbers showed and they are now using Countrywide as a scapegoat? We are 4.5 year into this and counting here.

 

Cardboard

 

If you like at the universe of 60+ delinquencies, we hit 6m households at the apex in 2009.  Just this week, we finally brought it down to 4m.  2m is a normal-ish number.  BAC has a disproportionate amount of those delinquent loans, which are causing a prolonged drag on their earnings.

 

BAC also is a much slower servicer than the rest of them due to litigation and mod behavior.

[Parsad]

Sure Sanjeev, but bad loans are written off once and you move on, same with lawsuits. Merrill is now profitable and I would guess as much if not more than Bear Stearns. What I struggle with is this apparent bloating that they can't seem to get rid of under SG&A. It wasn't there in the ROA and ROE numbers before the financial crisis. They were quite a bit better than JPM and among the very best even just a couple percentages away from WFC.

 

Is it just Countrywide remaining personel? I doubt it. Is it a lack of knowledge or skill in how to integrate new operations quickly? How did it work so well then before under Lewis? Is there something more sinister like BAC original being much worse than the numbers showed and they are now using Countrywide as a scapegoat? We are 4.5 year into this and counting here.

 

Cardboard

 

Again, Merrill is not a good example.  Countrywide was not something that needed cash and had good assets.  Countrywide was a two-ton anchor tied to a dinghy!  It's amazing that BAC is still standing after Lewis acquired Countrywide.  If something should have been left to die, Countrywide was it, and in hindsight, putting it into bankruptcy would have been cheaper. 

 

This turnaround is not dissimilar to Fairfax's.  You have to runoff the bad business, and there was plenty of it at BAC to begin with like other institutions.  But combined with Countrywide's portfolio, it is very similar to the 5-7 year turnaround at Fairfax.  BAC has been able to sell off assets, write off loans, and the banking industry is enjoying decent spreads, while Fairfax had a huge windfall with the CDS investment and positive results running off bad contracts.

 

The ballooning costs that BAC incurred was to service the massive loan porfolio it needs to run off.  You should start to see dramatic drops in SG&A through the second half of this year, if not sooner.  I think you will see their cost of capital drop to around JPM's over the next year.  Cheers! 

[Liberty]

CNBC segment where Buffett talks about banks:

 

http://video.cnbc.com/gallery/?play=1&video=3000151816

[Parsad]

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

[sampr01]

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!