BAC-WT - Bank of America Warrants

[ERICOPOLY]

You are right about the Buffett thing - doh, that slipped by me, sorry.  That should have added $5Bn in B3 capital, right?  My mistake. 

 

Maybe not your mistake.  I think my mistake.

 

From the conference call:

 

I also want to remind you that our Tier 1 capital and supplemental leverage ratios will benefit by approximately $2.9 billion in the second quarter of '14 if we receive shareholder approval to amend our Series T, preferred stock.

 

 

So the deal with amending Buffett's preferred stock didn't affect anything in this Q1 report.  The higher B3 capital under the "standard" calculation likely happened due to that convergence between "standard" and "advanced" that I posted about earlier today.

 

Therefore, we'll see a huge jump in B3 capital under "standard" method in the Q2 report.  There will be more convergence, there will be this extra $2.9 billion help from Mr. Buffett's preferred deal, and then there will be very clean pre-tax earnings (they took such a huge legal charge in Q1, I bet Q2 will be clean).

 

I wonder if it could be as much as 50 bps jump in capital ratios given all that happening in Q2.

[xazp]

Have you been following BAC's ability to pay off preferreds and/or debt?  Can interest expense decline materially from here or is that mostly over?  Deposit rates can not go much lower.

 

 

You are right about the Buffett thing - doh, that slipped by me, sorry.  That should have added $5Bn in B3 capital, right?  My mistake. 

 

Maybe not your mistake.  I think my mistake.

 

From the conference call:

 

I also want to remind you that our Tier 1 capital and supplemental leverage ratios will benefit by approximately $2.9 billion in the second quarter of '14 if we receive shareholder approval to amend our Series T, preferred stock.

 

 

So the deal with amending Buffett's preferred stock didn't affect anything in this Q1 report.  The higher B3 capital under the "standard" calculation likely happened due to that convergence between "standard" and "advanced" that I posted about earlier today.

 

Therefore, we'll see a huge jump in B3 capital under "standard" method in the Q2 report.  There will be more convergence, there will be this extra $2.9 billion help from Mr. Buffett's preferred deal, and then there will be very clean pre-tax earnings (they took such a huge legal charge in Q1, I bet Q2 will be clean).

 

I wonder if it could be as much as 50 bps jump in capital ratios given all that happening in Q2.

[ERICOPOLY]

Have you been following BAC's ability to pay off preferreds and/or debt?  Can interest expense decline materially from here or is that mostly over?  Deposit rates can not go much lower.

 

 

You are right about the Buffett thing - doh, that slipped by me, sorry.  That should have added $5Bn in B3 capital, right?  My mistake. 

 

Maybe not your mistake.  I think my mistake.

 

From the conference call:

 

I also want to remind you that our Tier 1 capital and supplemental leverage ratios will benefit by approximately $2.9 billion in the second quarter of '14 if we receive shareholder approval to amend our Series T, preferred stock.

 

 

So the deal with amending Buffett's preferred stock didn't affect anything in this Q1 report.  The higher B3 capital under the "standard" calculation likely happened due to that convergence between "standard" and "advanced" that I posted about earlier today.

 

Therefore, we'll see a huge jump in B3 capital under "standard" method in the Q2 report.  There will be more convergence, there will be this extra $2.9 billion help from Mr. Buffett's preferred deal, and then there will be very clean pre-tax earnings (they took such a huge legal charge in Q1, I bet Q2 will be clean).

 

I wonder if it could be as much as 50 bps jump in capital ratios given all that happening in Q2.

 

I don't know enough about it to comment.  There must be some benefit to rolling some expensive maturing LT debt into cheaper new LT debt.  There is a relatively vague debt maturity schedule on page 215:

http://media.corporate-ir.net/media_files/IROL/71/71595/AR2013.pdf

 

I say that it's "relatively" vague because it says for example that there are $22b worth of subordinated debt with the following description:

Fixed, with a weighted-average rate of 5.83%, ranging from 2.40% to 10.20%, due 2014 to 2038

 

Alright, so my next question is when does the 10.20% debt expire?  Well, they don't tell you that.  It is probably in some other filing somewhere but I'm just not motivated to look for it.

 

 

[LC]

For education purposes, does anyone know what filing a complete breakdown of a banks debt schedule would be in? Would it be somewhere in one of the call reports or something else filed with the SEC?

[ERICOPOLY]

Regarding B3 capital ratios:

 

At the end of Q4'13, they had 9.1% under "standard" and 9.96% under "advanced"  (difference of 86 bps)

At the end of Q1'14, they had 9.3% under "standard" and 9.90% under "advanced"  (difference of 60 bps)

 

So they converged by 26 bps.  On the Q4 conference call they said it would take 12 to 18 months for most of the convergence to complete.

 

I suppose if they pick up another 20bps in Q2, that would keep them on track for a 12 month convergence schedule.  So if they build $5.5b of capital from pre-tax earnings, pick up the $2.9billion from the Buffett deal, and then return $1.5b to shareholders...

 

That would leave them with about 70 bps increase in B3 Tier 1 capital ratio under "Standardized method".

 

So they could therefore hit 10% B3 ratio "standardized" by the end of this quarter.  That's pretty quick.

 

And it would put them around 10.5% under "standardized" by the end of Q3 (assuming similar convergence pace, another $5.5b of pre-tax earnings, and another $1.5b capital return in Q3).

 

So they would begin the CCAR process with 10.5% in hand.

 

Possibly 11% by end of Q4.  By the time next year's CCAR process is complete in late March, they would be maybe at 11.25% (but not yet reported at that time).

 

So this time perhaps we'll get some sort of maximized capital return.  Starting at 11% to 11.25% ought to justify that kind of scenario.

 

[Grenville]

For education purposes, does anyone know what filing a complete breakdown of a banks debt schedule would be in? Would it be somewhere in one of the call reports or something else filed with the SEC?

 

Have you checked the 10K?

[LC]

I checked the 10K, it does not break out each individual issue as far as I can tell. It gives two pieces of information. Per Eric's example above it listed subordinated notes characteristics:

 

-Fixed, with a weighted-average rate of 5.83%, ranging from 2.40% to 10.20%, due 2014 to 2038 - $22,379

 

-The second piece of information is the maturity schedule of this tranche.

 

However the crucial pieces of information as mentioned, is missing. I.e. when does the 10.2% debt come due?

 

[xazp]

I have some miscellaneous comments:

 

1)  CCAR process is completely opaque.  CCAR is not audited, there's no chance for a second opinion, and because it is not transparent, the banks can't even say -- OK well we disagree with the assumptions here.  In addition, banks can fail for non-quantitative reasons (like C did) and from the investor perspective (and from management's perspective) you really have no idea it's coming.  There's an interesting story about how the Fed Reserve of NY told C they could have until 2015 to fix certain problems ... which C thought was the case right until the Fed smacked them down. 

 

2)  However, investors overestimate the importance of direct capital return.  For one, it's not like the capital is destroyed, it just keeps accumulating until it is released later on. 

 

But second, and perhaps more subtle, the banks ARE allowed to use capital to buy back preferred and debt.  So if you end up buying $500MM of preferred instead of equity, you're basically giving the equity a bigger claim to the assets of the banks because you've cleaned out something ahead of the equity in priority.  In addition, it is more accretive to cash flow, because you are knocking out (say) a 6% yield preferred instead of a 1% yield equity.  That cash adds up over time and allows larger buybacks down the road.  So for BAC and C, even though they haven't gotten to buy as much equity as I'd like, buying stuff ahead of it is still pretty beneficial. 

 

3)  p281 has some preferred notes.  Looks to me like there's some 7%+ yielders that are callable. 

 

There's also a different direction, there are some preferred whose yields are related to LIBOR (here is an example) - http://finance.yahoo.com/q?s=BML-PH&ql=1  Well trading at $19.50, I wonder if they should just tender for a bunch of these and knock out future liabilities while LIBOR is low. 

 

 

 

Regarding B3 capital ratios:

 

At the end of Q4'13, they had 9.1% under "standard" and 9.96% under "advanced"  (difference of 86 bps)

At the end of Q1'14, they had 9.3% under "standard" and 9.90% under "advanced"  (difference of 60 bps)

 

So they converged by 26 bps.  On the Q4 conference call they said it would take 12 to 18 months for most of the convergence to complete.

 

I suppose if they pick up another 20bps in Q2, that would keep them on track for a 12 month convergence schedule.  So if they build $5.5b of capital from pre-tax earnings, pick up the $2.9billion from the Buffett deal, and then return $1.5b to shareholders...

 

That would leave them with about 70 bps increase in B3 Tier 1 capital ratio under "Standardized method".

 

So they could therefore hit 10% B3 ratio "standardized" by the end of this quarter.  That's pretty quick.

 

And it would put them around 10.5% under "standardized" by the end of Q3 (assuming similar convergence pace, another $5.5b of pre-tax earnings, and another $1.5b capital return in Q3).

 

So they would begin the CCAR process with 10.5% in hand.

 

Possibly 11% by end of Q4.  By the time next year's CCAR process is complete in late March, they would be maybe at 11.25% (but not yet reported at that time).

 

So this time perhaps we'll get some sort of maximized capital return.  Starting at 11% to 11.25% ought to justify that kind of scenario.

[no_free_lunch]

However, investors overestimate the importance of direct capital return.  For one, it's not like the capital is destroyed, it just keeps accumulating until it is released later on. 

 

Thanks for this.  I was kind of thinking along these lines but didn't know enough about banking to know if it's true or not.

[ERICOPOLY]

I have some miscellaneous comments:

 

1)  CCAR process is completely opaque.  CCAR is not audited, there's no chance for a second opinion, and because it is not transparent, the banks can't even say -- OK well we disagree with the assumptions here.  In addition, banks can fail for non-quantitative reasons (like C did) and from the investor perspective (and from management's perspective) you really have no idea it's coming.  There's an interesting story about how the Fed Reserve of NY told C they could have until 2015 to fix certain problems ... which C thought was the case right until the Fed smacked them down. 

 

2)  However, investors overestimate the importance of direct capital return.  For one, it's not like the capital is destroyed, it just keeps accumulating until it is released later on. 

 

But second, and perhaps more subtle, the banks ARE allowed to use capital to buy back preferred and debt.  So if you end up buying $500MM of preferred instead of equity, you're basically giving the equity a bigger claim to the assets of the banks because you've cleaned out something ahead of the equity in priority.  In addition, it is more accretive to cash flow, because you are knocking out (say) a 6% yield preferred instead of a 1% yield equity.  That cash adds up over time and allows larger buybacks down the road.  So for BAC and C, even though they haven't gotten to buy as much equity as I'd like, buying stuff ahead of it is still pretty beneficial. 

 

3)  p281 has some preferred notes.  Looks to me like there's some 7%+ yielders that are callable. 

 

There's also a different direction, there are some preferred whose yields are related to LIBOR (here is an example) - http://finance.yahoo.com/q?s=BML-PH&ql=1  Well trading at $19.50, I wonder if they should just tender for a bunch of these and knock out future liabilities while LIBOR is low. 

 

 

 

Regarding B3 capital ratios:

 

At the end of Q4'13, they had 9.1% under "standard" and 9.96% under "advanced"  (difference of 86 bps)

At the end of Q1'14, they had 9.3% under "standard" and 9.90% under "advanced"  (difference of 60 bps)

 

So they converged by 26 bps.  On the Q4 conference call they said it would take 12 to 18 months for most of the convergence to complete.

 

I suppose if they pick up another 20bps in Q2, that would keep them on track for a 12 month convergence schedule.  So if they build $5.5b of capital from pre-tax earnings, pick up the $2.9billion from the Buffett deal, and then return $1.5b to shareholders...

 

That would leave them with about 70 bps increase in B3 Tier 1 capital ratio under "Standardized method".

 

So they could therefore hit 10% B3 ratio "standardized" by the end of this quarter.  That's pretty quick.

 

And it would put them around 10.5% under "standardized" by the end of Q3 (assuming similar convergence pace, another $5.5b of pre-tax earnings, and another $1.5b capital return in Q3).

 

So they would begin the CCAR process with 10.5% in hand.

 

Possibly 11% by end of Q4.  By the time next year's CCAR process is complete in late March, they would be maybe at 11.25% (but not yet reported at that time).

 

So this time perhaps we'll get some sort of maximized capital return.  Starting at 11% to 11.25% ought to justify that kind of scenario.

 

 

I wonder though -- last year they specifically were given permission (CCAR results) to retire $5b of preferred.  This year there was no mention of it.  Why were they given permission to retire $5b last year if you claim they can retire debt and preferred without needing permission?

 

Second, I would rather they retire those 7% preferred rather than pay a dividend.  I get taxed so heavily on the dividend that I only get roughly 70 cents on the dollar...  So if I instead could force the company to use that money to retire preferred, why that would be the same thing as investing my after-tax dividend at 10% (taxable) yield.  And you can't get 10% taxable yields anywhere.  Second, it's not just the awesome yield I get on that money, it's also that it simultaneously reduces the risk to my common stock at the same time.  So I definitely want them to retire preferred instead of paying dividends, but unfortunately they chose to pay dividends instead.

[xazp]

My evidence that the Fed doesn't currently require approval for preferred repurchases is that Citigroup immediately called $2 billion of preferred after their CCAR rejection:

http://www.citigroup.com/citi/news/2014/140327b.htm

 

The previous year, C also called $3 billion of preferred the day after CCAR, and no mention of it in their CCAR approval. 

http://www.citigroup.com/citi/news/2013/130314a.htm

 

It seems possible to me that BAC asked for permission to buy back preferred shares without needing that permission.  Perhaps I'm wrong and C has been asking but isn't putting it in their news releases. 

 

 

I wonder though -- last year they specifically were given permission (CCAR results) to retire $5b of preferred.  This year there was no mention of it.  Why were they given permission to retire $5b last year if you claim they can retire debt and preferred without needing permission?

 

Second, I would rather they retire those 7% preferred rather than pay a dividend.  I get taxed so heavily on the dividend that I only get roughly 70 cents on the dollar...  So if I instead could force the company to use that money to retire preferred, why that would be the same thing as investing my after-tax dividend at 10% (taxable) yield.  And you can't get 10% taxable yields anywhere.  Second, it's not just the awesome yield I get on that money, it's also that it simultaneously reduces the risk to my common stock at the same time.  So I definitely want them to retire preferred instead of paying dividends, but unfortunately they chose to pay dividends instead.

[ERICOPOLY]

My evidence that the Fed doesn't currently require approval for preferred repurchases is that Citigroup immediately called $2 billion of preferred after their CCAR rejection:

http://www.citigroup.com/citi/news/2014/140327b.htm

 

The previous year, C also called $3 billion of preferred the day after CCAR, and no mention of it in their CCAR approval. 

http://www.citigroup.com/citi/news/2013/130314a.htm

 

It seems possible to me that BAC asked for permission to buy back preferred shares without needing that permission.  Perhaps I'm wrong and C has been asking but isn't putting it in their news releases. 

 

 

I wonder though -- last year they specifically were given permission (CCAR results) to retire $5b of preferred.  This year there was no mention of it.  Why were they given permission to retire $5b last year if you claim they can retire debt and preferred without needing permission?

 

Second, I would rather they retire those 7% preferred rather than pay a dividend.  I get taxed so heavily on the dividend that I only get roughly 70 cents on the dollar...  So if I instead could force the company to use that money to retire preferred, why that would be the same thing as investing my after-tax dividend at 10% (taxable) yield.  And you can't get 10% taxable yields anywhere.  Second, it's not just the awesome yield I get on that money, it's also that it simultaneously reduces the risk to my common stock at the same time.  So I definitely want them to retire preferred instead of paying dividends, but unfortunately they chose to pay dividends instead.

 

That makes sense.  I hope they are able to do so.

[Grenville]

I checked the 10K, it does not break out each individual issue as far as I can tell. It gives two pieces of information. Per Eric's example above it listed subordinated notes characteristics:

 

-Fixed, with a weighted-average rate of 5.83%, ranging from 2.40% to 10.20%, due 2014 to 2038 - $22,379

 

-The second piece of information is the maturity schedule of this tranche.

 

However the crucial pieces of information as mentioned, is missing. I.e. when does the 10.2% debt come due?

 

You can find the debt here:

 

http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

just search using the symbol/cusip: BAC

 

 

 

I checked the 10K and realized they didn't have much detail. I also checked the website and not much detail their either

[morningstar]

The capital return plans include calls of preferreds that contribute to Tier 1 capital, so they do have/need Fed approval. Regulators would probably provide a lot of flexibility to call TruPs, which decline to zero Tier 1 credit in 2015, during the term of this year's stress tests. I also think generally any healthy bank would be allowed to replace any preferred with new preferred stock.

 

Citi's preferred call earlier this year probably reflects them being allowed to continue their current (prior year) capital plan even though the Fed objected to their submission.

 

As for Bank of America, I think its preferred stock supply is pretty clean and doesn't offer a lot of room for improvement. In the current environment, new fixed-to-floating preferreds would probably cost 6% and new fixed-for-life preferreds probably in the mid 6% range. Currently, BAC's callable preferred stock is all mid-6% coupons or less so very much in line with market rates. There are a couple of higher rate issues (8% and 8.125% DRD preferreds) which will become callable in the next few years.

 

In TruPs, there are several 7%-range TruPs outstanding that were originally issued by Countrywide and Merrill. These are challenging for the bank because they are carried below face value due to the acquisition accounting. So calling them will impact capital through loss on debt redemption. I doubt any of those preferreds will be called this year. Otherwise, the remaining TruPs originally issued by BAC mostly represent very cheap sources of permanent loss-absorbing, subordinated financing. Although TruPs aren't going to have Tier 2 credit as things stand, I think such cheap options will be left outstanding until the bank sees what value they might ultimately have under the rules that are still being developed.

[LC]

I checked the 10K, it does not break out each individual issue as far as I can tell. It gives two pieces of information. Per Eric's example above it listed subordinated notes characteristics:

 

-Fixed, with a weighted-average rate of 5.83%, ranging from 2.40% to 10.20%, due 2014 to 2038 - $22,379

 

-The second piece of information is the maturity schedule of this tranche.

 

However the crucial pieces of information as mentioned, is missing. I.e. when does the 10.2% debt come due?

 

You can find the debt here:

 

http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

just search using the symbol/cusip: BAC

 

 

 

I checked the 10K and realized they didn't have much detail. I also checked the website and not much detail their either

 

Many thanks!

[jay21]

Vinod,

What do you think is an appropriate multiple for that 17 billion?

Thanks

 

This is the question I'm always grappling with.  I would think the multiple would be higher than historical, given the relative safety of the business these days (higher capital ratios, less leverage).  Oh well, no premium given for safety so far.

 

Higher capital levels are here to stay and they will trim ROEs.  Because of TBTF dynamics, big banks will be slow growers leading them to payout most of their earnings once the business stabilizes.  In this scenario, low ROEs won't matter and the multiple should be applied to a no/slow growth EPS.  Normalizing this quarter's results and giving a little forward credit to expense reductions I see a current multiple of 11-12.  I don't expect this to change in this environment.

 

The next leg up for earnings will come from a significant increase in rates.  Unfortunately, with higher rates come lower multiples that will offset the higher EPS.  After 2 1/2 years as an owner, I don't see a path to a significantly higher stock price from here.

 

What do you think about Dimon's comment in his letter this year?  He seems to have taken down his ROTE by only 1% to account for industry changes.

[fareastwarriors]

Big-Bank Stocks Weighed Down by Lucky '13

 

 

http://online.wsj.com/news/articles/SB10001424052702304049904579515791720594048?mg=reno64-wsj

[ERICOPOLY]

Big-Bank Stocks Weighed Down by Lucky '13

 

 

http://online.wsj.com/news/articles/SB10001424052702304049904579515791720594048?mg=reno64-wsj

 

Article is factually inaccurate:

 

"Bank of America is valued at 13.7 times forward earnings"

 

Unless "forward" includes the past quarter.

[dcollon]

From SeekingAlpha:

 

Revolving door to go into reverse? Regulators better-paid than bankers

• The average compensation at the OCC and the CFPB in 2012 was $190K, writes the AEI's Paul Kupiec, which towers over the average salary of about $50K for bank employees. Is it the special skills of regulators? Probably not. OCC secretaries average about $80K per year and FDIC limo drivers pull down $82K. Human resources management trainees at the CFPB make about $111K.

• In 2012, 68% of FDIC and CFPB staff - and 66% at OCC - made more than 100K per year, with 19% earning over $180K. Less than 7% of employees at these agencies earn less than 50K - put another way, 93% earned more than the average banker's salary in 2012.

• Who pays? Bank shareholders (and customers), mostly, through deposit insurance premiums and examination fees levied by the agencies. The CFPB is funded through the Federal Reserve (which doesn't disclose pay, but it's likely even higher than the other regulators).

 

[rkbabang]

Anyone worried about the Providence, RI lawsuit? It sounds pretty ridiculous to me.  I don't know what the city is like now, but I grew up about 15 minutes from Providence and back then it was an open secret that the city government had been being run by the mob for decades.  You will never find a more wretched hive of scum and villainy.

 

http://seekingalpha.com/article/2156513-bank-of-america-another-sham-lawsuit-has-potentially-grave-implications

[dutchman]

U.S. Said to Seek More Than $13 Billion From BofA in RMBS Probe

 

http://www.bloomberg.com/news/2014-04-24/u-s-said-to-ask-bofa-for-more-than-13-billion-over-rmbs.html

 

 

How much of this was expected ??

[xazp]

I've lost the distinction between this and previous settlements.  It seems to me this is a similar issue to existing settlements, but somehow Justice gets an additional multi-billion dollar payout? 

 

I actually thought the FHFA settlement was the last major one ... so, I'm in the dark as to what this is about.  Someone enlighten me?

 

U.S. Said to Seek More Than $13 Billion From BofA in RMBS Probe

 

http://www.bloomberg.com/news/2014-04-24/u-s-said-to-ask-bofa-for-more-than-13-billion-over-rmbs.html

 

 

How much of this was expected ??

[ERICOPOLY]

It will be very annoying if this isn't already fully reserved for.  Given that last week they announced an increase in reserves (perhaps for this lawsuit), and two months ago they claimed maximum additional liability for existing issues was $6.1b (of which they've already used up $6b).

 

[dutchman]

Would they have allowed the div hike and buyback if they werent reserved ?  God I hope they are.

[Grenville]

Here's CNBC with a 10bln number.

 

http://www.cnbc.com/id/101582319

 

I hope they are reserved for this.