BAC-WT - Bank of America Warrants

[gary17]

I guess if you're a fan of "adjusted earnings" you could argue that.  CBB + GWIM + GB + GM add up to about $5Bn. 

 

It's not hard to report good earnings if you are allowed to subtract out the divisions that are losing money!

 

It raises an interesting point though ... if you assume CRES is eventually break-even or dare I say profitable (mortgage servicing of paying customers is a profitable, boring business - mortgage servicing of non-paying customers is a money-losing, exciting business) then indeed they would be doing $5Bn+/quarter without even the interest rate shift.  Something to think about after I'm done fuming.  There actually is a pretty straightforward path to $20Bn in earnings if you look at it that way. 

 

 

Also ... BAC does not earn $5Bn/quarter, give me a break. 

 

 

"$5B+/quarter" -  not "$5B/quarter" !

 

xazp - I don't listen much to conference calls... but did they every discuss when and if CRES might become break even? I believe  that business lost about 5B+ in 2013.

 

thanks

[xazp]

They don't say when CRES may be break-even.  Here's a break down of what they've got so far. 

 

From Q1:

CRES revenue ~$1.2Bn

Litigation expense ~$5.8Bn

Provision for credit losses ~$0

Rep/Warranties ~.2Bn

LAS expense ~1.6Bn

non-LAS expense ~.7Bn

 

I think in 2016 LAS should come down to .5Bn.  Litigation and R&W should come down a lot, maybe it will be .3Bn total (total guess).  CRES revenue will come down too but I don't have a good handle on that.  I guess taking a wild stab at it, 2016 will show losses in the hundreds of millions per quarter.  I don't really know when it will show a profit - I just have the intuition that mortgage servicing when your loans have normalized is a profitable business - otherwise why would anyone be in that business?  I don't know how long it will take to normalize entirely, but they're definitely making progress on this front. 

 

 

 

I guess if you're a fan of "adjusted earnings" you could argue that.  CBB + GWIM + GB + GM add up to about $5Bn. 

 

It's not hard to report good earnings if you are allowed to subtract out the divisions that are losing money!

 

It raises an interesting point though ... if you assume CRES is eventually break-even or dare I say profitable (mortgage servicing of paying customers is a profitable, boring business - mortgage servicing of non-paying customers is a money-losing, exciting business) then indeed they would be doing $5Bn+/quarter without even the interest rate shift.  Something to think about after I'm done fuming.  There actually is a pretty straightforward path to $20Bn in earnings if you look at it that way. 

 

 

Also ... BAC does not earn $5Bn/quarter, give me a break. 

 

 

"$5B+/quarter" -  not "$5B/quarter" !

 

xazp - I don't listen much to conference calls... but did they every discuss when and if CRES might become break even? I believe  that business lost about 5B+ in 2013.

 

thanks

[ERICOPOLY]

So... let's beat up on ourselves for a minute here.  The shares two months ago traded for $18.  That was the equivalent of $20 given that they were f**** LYING about the reserves and then, of course, the problem with the huge amount of regulatory capital that went missing.

 

Kicking self for not selling more.  Mistake.

[finetrader]

If you think about it, all the bad things that are happening to BofA right now are caused by the government of his own country:

 

- the harder stress test imposed this year by the FED

- the DOJ lawsuit

- this lack of regulatory capital ( government entity requirement with no impact on GAAP profit)

 

How long can a government go against a US company that is part of his future success..

[Fat Pitch]

They say patience is a virtue. You got yourself a franchise bank with a very valuable deposit base. Mediocre managers acquired Countrywide for ~4 billion which almost torpedoed this franchise into oblivion. Despite all that stupidity, the bank is still kicking around and slowly healing. There is a very strong business model at play here, but you still have cockroaches that need to clear out and mediocre managers. Luckily for us, the Feds won't allow these banks to make acquisitions again... I hope.

 

It should be pretty apparent why Buffet made sure those warrants he received didn't expire until ~2020... he probably saw a slow recovery process, but once it is all cleared up you got a damn good business out of the bargain. Turns out if you just loaded up on Wells Fargo, you'll be collecting decent dividends that can be reinvested into BofA at these current prices. Superior management and culture really does make all the difference... who would have thought that? 

 

[writser]

@Finetrader: in the years running up to the financial crisis the situation was exactly the other way around. Payback time, I guess ..

[Uccmal]

So... let's beat up on ourselves for a minute here.  The shares two months ago traded for $18.  That was the equivalent of $20 given that they were f**** LYING about the reserves and then, of course, the problem with the huge amount of regulatory capital that went missing.

 

Kicking self for not selling more.  Mistake.

 

So, your kicking yourself for your lack of predictive powers, or for making a mistake that was not a mistake.  Or did you do something really stupid like sell put options on a volatile stock?

 

As Fat Pitch said, the franchise is intact.  When this crap blows over the stock will resume its upward march.  Here is what I see, backed up by buying 55000 $15 2016 Leaps in the last two weeks:

 

1) Earnings power is still there, underneath the sh*t.

2) Capital plan will be resubmitted, and approved with some level of dividend/buyback, maybe even the same amount.  Stock will pop on that news.  The capital will pile up, if it is not paid out. 

3) Buffetts stake now counts as Tier 1.

4).DOJ settlement will occur at some point, preferably sooner rather than later.  Stock will pop immediately on this news.

 

It has been a demoralizing slaughterhouse the last few weeks.  However a drop of <20% is not even particularly volatile unless you happen to have Leaps, like I do.  But, we have been through this before with BAC, FFH, spring 2009, and I have always ended up ahead. 

[ERICOPOLY]

If you think about it, all the bad things that are happening to BofA right now are caused by the government of his own country:

 

- the harder stress test imposed this year by the FED

- the DOJ lawsuit

- this lack of regulatory capital ( government entity requirement with no impact on GAAP profit)

 

How long can a government go against a US company that is part of his future success..

 

That's probably my fault.  One year after I get hired, Microsoft gets sued and the next decade is highlighted first by five years of court battles, then by five more years of compliance drills/headaches.

 

Bank of 'Merika would be cleared if I wasn't here.

 

[Uccmal]

actually, Its my fault.  To the exact day I stopped working (the day job) my stocks have been getting hammered.  Happy to have Seaspan, And RBS preferreds to live on right now. 

[ERICOPOLY]

Or did you do something really stupid like sell put options on a volatile stock?

 

1)  I booked some large short-term capital gains when I closed out the BAC covered calls that I had written, and also when I closed out some of my IWM short

 

2)  In order to collect an offsetting loss, rolled my $17 strike 2016 BAC puts into $16 strike November 2014 BAC puts (thinking they would easily expire worthless)

 

3)  Now I'm looking at a large short-term capital gain on the $16 strike puts and sweating that they won't expire worthless.  I have a huge tax bill looming if they don't.

[ERICOPOLY]

actually, Its my fault.  To the exact day I stopped working (the day job) my stocks have been getting hammered.  Happy to have Seaspan, And RBS preferreds to live on right now.

 

It could get interesting in that case.  I quit in mid-January 2008. 

[MYDemaray]

If you think about it, all the bad things that are happening to BofA right now are caused by the government of his own country:

 

- the harder stress test imposed this year by the FED

- the DOJ lawsuit

- this lack of regulatory capital ( government entity requirement with no impact on GAAP profit)

 

How long can a government go against a US company that is part of his future success..

 

That's probably my fault.  One year after I get hired, Microsoft gets sued and the next decade is highlighted first by five years of court battles, then by five more years of compliance drills/headaches.

 

Bank of 'Merika would be cleared if I wasn't here.

 

Sounds like we should all fly out to Santa Barbara, take you down to the pier and throw you off. Maybe a large fish will swallow you and BAC's waters will calm. Just let us know what day works for you...

[Spekulatius]

So... let's beat up on ourselves for a minute here.  The shares two months ago traded for $18.  That was the equivalent of $20 given that they were f**** LYING about the reserves and then, of course, the problem with the huge amount of regulatory capital that went missing.

 

Kicking self for not selling more.  Mistake.

 

I am not sure why the peak price 2 month ago is relevant. 7 month ago or so, BAC was priced at 14$ and less than a year ago, it could be bought for 12$. I think that relative to better stocks like JPM (direct comparable) and GS, BAC is currently fairly valued, if not overvalued.

 

JPM and BAC are pretty comparable in terms if size and business mix and tangible assets and JPM's market cap is 1.3x BAC, but has structurally higher profitability, better management, not much legal issues. Now consider that JPM has a dividend and can do stock buybacks, while BAC is still battling legacy issues, I can extrapolate that in 2 years, JPM will look cheaper than BAC. I personally would not be a buyer of BAC above tangible book currently.

[xazp]

Spek, good to see you here. 

 

I think it's debatable whether JPM or BAC is worth more in the long term.  I think it depends on what you think is more important. 

 

Areas JPM has an advantage:

Management

Investment Banking

Trading

Legacy issues & litigation

Near-term capital return

Costs/margins

 

Areas BAC has an advantage:

Capital ratios, capital requirements, and long-term capital return

Deferred tax assets

Deposit base

Consumer franchise

Wealth management

 

So I agree with your points on JPM's advantages; but I also think BAC has advantages too.  IMO JPM's advantages are more short-term in nature; BAC's advantages are further down the road.  For example, BAC has a huge deposit base (Buffett talks about this) is something that has little value now, but a lot of value when interest rates rise.  BAC capital requirements are lower than JPM's, which structurally is an advantage when there are actually loans to be made. 

 

I'm in the opposite camp of Spek - I've been selling JPM to buy BAC at current prices.  I actually think BAC in the long run will be closer to parity with JPM on a market cap basis (I don't think they will reach parity, I agree JPM is a better bank, but the 15-20% of the 30% I would still like having). 

 

 

I am not sure why the peak price 2 month ago is relevant. 7 month ago or so, BAC was priced at 14$ and less than a year ago, it could be bought for 12$. I think that relative to better stocks like JPM (direct comparable) and GS, BAC is currently fairly valued, if not overvalued.

 

JPM and BAC are pretty comparable in terms if size and business mix and tangible assets and JPM's market cap is 1.3x BAC, but has structurally higher profitability, better management, not much legal issues. Now consider that JPM has a dividend and can do stock buybacks, while BAC is still battling legacy issues, I can extrapolate that in 2 years, JPM will look cheaper than BAC. I personally would not be a buyer of BAC above tangible book currently.

[txlaw]

I think that relative to better stocks like JPM (direct comparable) and GS, BAC is currently fairly valued, if not overvalued.

 

That's an odd way to think about it. 

 

IMO, both JPM and BAC are very undervalued -- on an absolute, risk-adjusted basis.  Of course, I happen to own a substantial amount of JPM TARP warrants and BAC LEAPS, so I guess I'm talking my book.

[gary17]

I was re-reading Ben Graham's Intelligent Investor about the Margin of Safety.  I am quite familiar with the Margin of Safety talked about by Buffett - thinking about it like a long term bond with some coupon and expiration date determined by the analyst... the more predictable the business the more it is like a bond.....    But interestingly, Ben has a different approach - he looks at the company's corporate bond rate as the riskiness of the business... something the bondholders are willing to tolerate for the return, etc.  Then, he says if the earnings power, which is E/P, is larger than that, then over a long term it constitutes a large margin of safety.  As the stockholders would be taking the same risk as bondholders, but can participate in a % higher of interest in the company. 

 

I am wondering though if Ben's method applies to a stock like Bank of America.  The forward earnings is about P/E = 9 or the earnings power is 1 / 9 = 11%....  But do banks issue corporate bonds? I believe from the annual report they have notes and preferred shares  - could it be a complete waste of time to look at margin of safety down this path?

 

Thanks , Gary

[txlaw]

For example, BAC has a huge deposit base (Buffett talks about this) is something that has little value now, but a lot of value when interest rates rise. 

 

But remember, xazp, JPM has Chase bank under its belt.  It can take market share from BAC and WFC and create a sticky deposit base that is equivalent to those guys' deposit base.  I myself have been a long time BofA customer, but I am seriously considering switching everything to Chase.  Because only JPM was smart enough to give me a mortgage when I needed it, and I also have a credit card with them.

 

Things I love about JPM:

 

-The upside of building a BAC- and WFC-like deposit base in the US

-Credit card franchise that is becoming a real rival to AXP's (though it's not close looped)

-Outstanding IB ops

-Best corporate banking biz?

-Payments system growth that can take away from C's franchise

-Global ops that are much better run than C's

-Strongly growing asset management biz that can rival BX, AZ, etc.

-Opportunity to remake/simplify biz portfolio and re-allocate to higher return ideas (e.g., selling commodities biz)

-Outstanding management

 

JPM is the banker's bank and the type of bank that I would go to if I ran a big multinational corporation.  It's just a fantastic company with outstanding management. 

[ERICOPOLY]

I am not sure why the peak price 2 month ago is relevant. 7 month ago or so, BAC was priced at 14$ and less than a year ago, it could be bought for 12$.

 

I've read this over a few times and I can't see where your confusion is.  $18 is a better selling price than $14 or $12.

[xazp]

Well the question is whether JPM's superior management is basically such a long-term advantage that it makes up for the 30% higher market cap. 

 

On the growth side, BAC's says its easier to grow internationally (taking share from sucky, under-capitalized European banks), than for JPM to grow domestically (through WFC, BAC, USB). 

 

The thesis for BAC is basically they can "return to mediocrity."  Their metric growth is mostly just by getting rid of legacy costs and getting the company in-line on its expenses will get BAC earning something close to JPM (but at a 30% discount).  The thesis for JPM is the better management means a permanent and widening gap with BAC.  I think both are plausible (and I also think both will be good investments).  Buffett seems to prefer BAC even though he agrees that Dimon is the best guy in the business.

 

I'm prefer BAC right now, but for example during the "whale" I preferred JPM.  So for me it is a question about price. 

 

 

For example, BAC has a huge deposit base (Buffett talks about this) is something that has little value now, but a lot of value when interest rates rise. 

 

But remember, xazp, JPM has Chase bank under its belt.  It can take market share from BAC and WFC and create a sticky deposit base that is equivalent to those guys' deposit base.  I myself have been a long time BofA customer, but I am seriously considering switching everything to Chase.  Because only JPM was smart enough to give me a mortgage when I needed it, and I also have a credit card with them.

 

Things I love about JPM:

 

-The upside of building a BAC- and WFC-like deposit base in the US

-Credit card franchise that is becoming a real rival to AXP's (though it's not close looped)

-Outstanding IB ops

-Best corporate banking biz?

-Payments system growth that can take away from C's franchise

-Global ops that are much better run than C's

-Strongly growing asset management biz that can rival BX, AZ, etc.

-Opportunity to remake/simplify biz portfolio and re-allocate to higher return ideas (e.g., selling commodities biz)

-Outstanding management

 

JPM is the banker's bank and the type of bank that I would go to if I ran a big multinational corporation.  It's just a fantastic company with outstanding management.

[finetrader]

I've read this over a few times and I can't see where your confusion is.  $18 is a better selling price than $14 or $12.

 

I think the share price drop from 18 to 14.5$ that happened lately is a bit comparable to the drop in BAC shares from 10$ to 7$ that happened about 2 years ago. The 'peak' in share price were not very solid. At that time I was kicking myself for not having sold shares at the 'peak' but I knew that I was not going to sell would BAC cross 10$ again because I knew that when it would do it , it would have been much more assumed by the market.

 

We will see BAC at 18$ in the future I'm pretty sure of that because BofA's profitability justifies it.

My target selling price is 20$. That was my intention when I bought to profit from the recovery. But, also, using Buffett strategy, BofA could be a good stock to put aside, forget about it, and look many years later ( 10 years let say) where it is trading at and it also could be a nice way to play it.

 

[txlaw]

I'm prefer BAC right now, but for example during the "whale" I preferred JPM.  So for me it is a question about price. 

 

Fair enough. 

 

I wouldn't be in JPM common versus BAC common, but I the TARP warrant leverage for JPM is very attractive versus most investment opportunities available right now. 

[gary17]

BAC growing internationally... no disrespect to any American friends here, but not sure if "America" in the brand is an asset or liability outside of the US...

[Spekulatius]

Well the question is whether JPM's superior management is basically such a long-term advantage that it makes up for the 30% higher market cap. 

 

On the growth side, BAC's says its easier to grow internationally (taking share from sucky, under-capitalized European banks), than for JPM to grow domestically (through WFC, BAC, USB). 

 

The thesis for BAC is basically they can "return to mediocrity."  Their metric growth is mostly just by getting rid of legacy costs and getting the company in-line on its expenses will get BAC earning something close to JPM (but at a 30% discount).  The thesis for JPM is the better management means a permanent and widening gap with BAC.  I think both are plausible (and I also think both will be good investments).  Buffett seems to prefer BAC even though he agrees that Dimon is the best guy in the business.

 

I'm prefer BAC right now, but for example during the "whale" I preferred JPM.  So for me it is a question about price. 

 

 

For example, BAC has a huge deposit base (Buffett talks about this) is something that has little value now, but a lot of value when interest rates rise. 

 

But remember, xazp, JPM has Chase bank under its belt.  It can take market share from BAC and WFC and create a sticky deposit base that is equivalent to those guys' deposit base.  I myself have been a long time BofA customer, but I am seriously considering switching everything to Chase.  Because only JPM was smart enough to give me a mortgage when I needed it, and I also have a credit card with them.

 

Things I love about JPM:

 

-The upside of building a BAC- and WFC-like deposit base in the US

-Credit card franchise that is becoming a real rival to AXP's (though it's not close looped)

-Outstanding IB ops

-Best corporate banking biz?

-Payments system growth that can take away from C's franchise

-Global ops that are much better run than C's

-Strongly growing asset management biz that can rival BX, AZ, etc.

-Opportunity to remake/simplify biz portfolio and re-allocate to higher return ideas (e.g., selling commodities biz)

-Outstanding management

 

JPM is the banker's bank and the type of bank that I would go to if I ran a big multinational corporation.  It's just a fantastic company with outstanding management.

 

I think it is well worth paying up a little for better management. The neat thing about JPM and BAC are that they are very similar in terms if size, balance sheet etc. JPM is just a better bank. A few example's from the latest 10-q: - JPM's NIM is 2.66% and BAC is 2.33%. JPM 's compensation expense is 2B$ lower than BAC (~8B$ vs BC ~10B$ and has been falling faster). Both have now very similar credit card earnings, but JPM's has taken quite a bit if market share. JPM's deposits were 1.2T$ vs BAC's ~1.1T$ (there may be structural differences in the deposit base, I have not checked). At least in CA, Chase has taken huge market share in deposits from BAC via the Wamu takeover and organic growth, while BAC has been licking their wounds.

 

Morgan's bank is better than Merrill Lynch, imo. I also think that Chase wealth management is better and has grown stronger than BAC. I have been Credit card customer with both BAC and Chase and I can say that Chase is way better (offerings and customer service are better). All the above are structural advantages that have nothing to do with BAC legancy issues (which come on top of that). The 2B$ in compensation expense alone is 8B$/year in earnings power. Can BAC close that gap? They probably will close some of it, but it will take many years and most likely some of JPM's advantages will remain in place.

 

That said, I agree it's more of a case that both JPM and BAC (and C while we are at it) are cheap. I would be inclined to buy BAC at tangible book (~13.8$ if they accounting is correct ), but I think the relative bargain is JPM more so than BAC.

[tombgrt]

I agree with JPM being the better bargain at this point and I think http://brooklyninvestor.blogspot.ca/2014/03/jpm-investor-day-2014.html makes a good case for it. If you take normalized EPS of $6.9 with 5% growth/year and a 13x multiple you'd get  almost $110 stock price. Assuming the strike price for the warrants is adjusted downwards to $35 (assuming no increased dividend) you get a possible 4 bagger without even really stretching your assumptions. Either way you get good leverage without taking excessive risk. It's unlikely the stock will sit at the current level in 4 years time but if it does you get out at break even and in that case you're likely able to pick up even better bargains.

[ERICOPOLY]

How much are BAC's tax assets worth?  Present value of them (incorporating a discount for the amount of time we wait for them to be monetized).

 

Strip that off the price.

 

Compare remainder valuation to JPM's valuation.  Comparing them as a multiple to their after-tax earnings power, not their book values.

 

I feel like that get closer to an apples-to-apples comparison.