BAC-WT - Bank of America Warrants

[ERICOPOLY]

Meaning we could be looking at about a $3B/quarter earnings with no increase in interest rate....  with 11B shares out that's about $0.27/quarter or $1.1/year  ...

 

How did you come up with only $3b a quarter?

 

I personally come up with more like $1.80.

 

I just did a very quick $2.19B this quarter+ $800m less in LAS expense = $3B --  perhaps over simplifying this.

 

This past quarter had a $4b pre-tax litigation expense that cost them 0.22 per share after-tax. 

 

See slide 2 on the second quarter earnings presentation:

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations&cm_re=EBZ-Corp_SocialResponsibility-_-About_Us-_-EI38LT000E_About_Us_Presentations#fbid=Y0WdP0s6CkV

 

So pre-tax income was $7b (excluding the litigation expense).  The normal level of quarterly litigation expense is higher than $0 but less than $4b.

[gary17]

Meaning we could be looking at about a $3B/quarter earnings with no increase in interest rate....  with 11B shares out that's about $0.27/quarter or $1.1/year  ...

 

How did you come up with only $3b a quarter?

 

I personally come up with more like $1.80.

 

I just did a very quick $2.19B this quarter+ $800m less in LAS expense = $3B --  perhaps over simplifying this.

 

This past quarter had a $4b pre-tax litigation expense that cost them 0.22 per share after-tax. 

 

See slide 2 on the second quarter earnings presentation:

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations&cm_re=EBZ-Corp_SocialResponsibility-_-About_Us-_-EI38LT000E_About_Us_Presentations#fbid=Y0WdP0s6CkV

 

Thanks.. I missed that.    So we could be looking at $1.8 ~ $2.0 EPS per year assuming no further legal expenses...  and assuming the interest rate stays where it is... the economy stays where it is.

 

The million dollar question now is what would be a fair multiple -

 

Some people like book value multiple.

 

Some like 12x or 15x perhaps as the Bank is now 'safer'.  This could mean $25 - $30/share by 2016.

 

 

[ERICOPOLY]

Meaning we could be looking at about a $3B/quarter earnings with no increase in interest rate....  with 11B shares out that's about $0.27/quarter or $1.1/year  ...

 

How did you come up with only $3b a quarter?

 

I personally come up with more like $1.80.

 

I just did a very quick $2.19B this quarter+ $800m less in LAS expense = $3B --  perhaps over simplifying this.

 

This past quarter had a $4b pre-tax litigation expense that cost them 0.22 per share after-tax. 

 

See slide 2 on the second quarter earnings presentation:

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations&cm_re=EBZ-Corp_SocialResponsibility-_-About_Us-_-EI38LT000E_About_Us_Presentations#fbid=Y0WdP0s6CkV

 

Thanks.. I missed that.    So we could be looking at $1.8 ~ $2.0 EPS per year assuming no further legal expenses...  and assuming the interest rate stays where it is... the economy stays where it is.

 

The million dollar question now is what would be a fair multiple -

 

Some people like book value multiple.

 

Some like 12x or 15x perhaps as the Bank is now 'safer'.  This could mean $25 - $30/share by 2016.

 

My opinion is that it will trade based on earnings.  Somewhere from 10x to 12x.

 

Then there is the excess capital that will be generated from the NOLs, and the capital freed up by the disallowed DTAs, and the capital freed up as they wiggle their way through their bad real estate loans.  They use that freed-up capital to retire shares or pay dividends that you use to buy more shares (effectively the same thing).

 

So I don't know.  I think it's more than $1.80 per share when you consider that you'll either have fewer outstanding shares or more shares in your portfolio once that freed up capital materializes.

[ERICOPOLY]

FIRREA carries a 10 yr statute of limitations.  So the market might still stress out about that until the bulk of the 10 year sliding window of risk has passed.  So perhaps you don't get to 12x earnings until 2017 or 2018.

[Uccmal]

I have been thinking about this.  JPM is trading about Book Value.  WFC is at 1.5 Book, more or less. 

 

WFC and JPM,have dividends 2.5 x higher than BAC - but the actual dollar value is really immaterial in all cases. 

 

IMHO, all of the big banks are trading cheaply.  Canadian banks trade in the 1.7 to 2.5 book range.  The dynamics are different for the big 5/6 in Canada versus the US banks - they are more protected.

 

So maybe an ultimate 1.5 x book value is more appropriate for BAC, which tops us at $30.  I know that my position will be 50% less when we reach $20, than it is now.  I will get into a longer term smaller position should the stock grow some legs. 

 

Markets are unpredictable.  Clearing away all the wreckage may mean that people stop speculating and see that BAC doesn't have a run rate better than 1.50 per year.  We just dont know. 

[ERICOPOLY]

The multiple to book metric is pretty lame.

 

One company that grew entirely organically is going to trade at a higher price to book value versus the bank that has grown through acquisitions.  The latter will have lots of goodwill on the books, the former won't.  All other things being equal.

 

So just use price to tangible book value.  That's the way to compare one versus the other.

[ERICOPOLY]

Royal Bank of Canada (RY) trades at:

2.5x book value

13.7x PE ratio

 

Okay, so apply that PE multiple to BAC with $1.80 per share of earnings:

 

$24.66 share price at 13.7x PE ratio

1.17x book value

 

So one banks' 2.5x book value is another banks' 1.17x book value.

 

Investors care primarily about the earnings.

[fareastwarriors]

BofA's Prospects Are Still Unsettled

 

 

 

http://online.wsj.com/articles/heard-on-the-street-bofas-prospects-are-still-unsettled-1407442616

[Uccmal]

Royal Bank of Canada (RY) trades at:

2.5x book value

13.7x PE ratio

 

Okay, so apply that PE multiple to BAC with $1.80 per share of earnings:

 

$24.66 share price at 13.7x PE ratio

1.17x book value

 

So one banks' 2.5x book value is another banks' 1.17x book value.

 

Investors care primarily about the earnings.

 

Agree and disagree.  Investors care about earnings, but earnings go to increasing Bv/share and/or payouts. 

 

As I said Canadian Banks are protected and are therefore more profitable than Us banks.  They also universally pay out higher dividends.  So, using your argument, if Ry trades at 13.7 x earnings, BAC is maybe only worth 9x or 10 x earnings which gets us to 1.50 x 10= 15.00, or 18 under your scenario.  Unless I see rapid improvement in the business from here on, I will be exiting most of my leap poisitions, and wont renew them this fall. 

 

I should probably sell all my Bac and invest it all in the Canadian Banks, and be done with it.  With dividends they double every 4-5 years or so. 

[merkhet]

It's almost like if you see a guy doing something stupid and injuring himself, you then arrest him for assaulting himself. 

 

Except we actually do that. People get arrested and then put in a psychiatric ward for trying to jump off tall structures -- if they're not successful that is.

[rkbabang]

It's even more convoluted, because the law they're using (FIRREA) is a law intended to punish people who defraud federally insured banks. 

So the intention of this law was, if you forge a check, that's worse than regular old fraud because you're messing with the federal government who is ensuring the bank behind the check. 

 

So DOJ's claim is that BAC has defrauded BAC.  But, even though BAC is both the injurer and the injured party, DOJ gets the money. 

 

It's almost like if you see a guy doing something stupid and injuring himself, you then arrest him for assaulting himself. 

 

Not very surprising.  After all, this is the same government that claims the interstate commerce clause allows them to arrest you if you grow pot in your greenhouse to smoke it in your home.  They will then steal your car and your home whether or not they get around to charging you with a crime, because your property was also guilty of a crime and has no rights.

 

 

[xazp]

I believe ... though of course we're playing calvinball ... this is the last major settlement with the government. 

 

 

FIRREA carries a 10 yr statute of limitations.  So the market might still stress out about that until the bulk of the 10 year sliding window of risk has passed.  So perhaps you don't get to 12x earnings until 2017 or 2018.

[Liberty]

I should probably sell all my Bac and invest it all in the Canadian Banks, and be done with it.  With dividends they double every 4-5 years or so.

 

Have you looked at Canada's real estate situation? I think there's a very good chance that these banks might be at the peak of the cycle.

[gary17]

I should probably sell all my Bac and invest it all in the Canadian Banks, and be done with it.  With dividends they double every 4-5 years or so.

 

Have you looked at Canada's real estate situation? I think there's a very good chance that these banks might be at the peak of the cycle.

 

Lol. Most high end buys in Canada are cash buys. And even mortgage ones have good down payment. Looks quite.different from USA and Ireland.

[alertmeipp]

I believe ... though of course we're playing calvinball ... this is the last major settlement with the government. 

 

 

FIRREA carries a 10 yr statute of limitations.  So the market might still stress out about that until the bulk of the 10 year sliding window of risk has passed.  So perhaps you don't get to 12x earnings until 2017 or 2018.

 

Yes, for this round.

[xazp]

What do you mean that Canadian banks are "protected?"

 

The way I think about it, Canadian banks made a lot fewer mistakes during our housing boom than (in particular) BAC or C.  So, Canadian bank earnings are much closer to "optimal." 

 

BAC is the second largest bank in the U.S.; so for a second let's pretend they hit optimal earnings in the next few years.  How much would they earn?  $3/share?  (this would be about equal to WFC's current ROA).  So BAC would probably be a 100-140% gainer from here if (big if) they could hit that optimal level of earnings. 

 

I think $2/share is probable for BAC (that's just cost-cuts and a modest level of interest rate hikes).  $3/share, I think is a stretch - that's "optimal" but BAC hasn't proven itself capable of that.  So I think an investment in BAC is largely dictated by where you think BAC ends up between $2 and $3/share in earnings.  $2/share is a hold for me, $3/share is a buy. 

 

The wild card is whether they can buy back shares in such a way that EPS down the road can hit something closer to $3/share.  Again, they have shown zero ability to reduce share count, but in fact I think it would be easier for BAC to hit $3/share in earnings mostly via buybacks than for them to try to optimize their fairly mediocre organization.  So, for example if they could do $24Bn in earnings (~where JPM, WFC are today), but reduce share count to 8Bn, that would do the trick. 

 

 

 

 

 

 

 

 

 

 

Royal Bank of Canada (RY) trades at:

2.5x book value

13.7x PE ratio

 

Okay, so apply that PE multiple to BAC with $1.80 per share of earnings:

 

$24.66 share price at 13.7x PE ratio

1.17x book value

 

So one banks' 2.5x book value is another banks' 1.17x book value.

 

Investors care primarily about the earnings.

 

Agree and disagree.  Investors care about earnings, but earnings go to increasing Bv/share and/or payouts. 

 

As I said Canadian Banks are protected and are therefore more profitable than Us banks.  They also universally pay out higher dividends.  So, using your argument, if Ry trades at 13.7 x earnings, BAC is maybe only worth 9x or 10 x earnings which gets us to 1.50 x 10= 15.00, or 18 under your scenario.  Unless I see rapid improvement in the business from here on, I will be exiting most of my leap poisitions, and wont renew them this fall. 

 

I should probably sell all my Bac and invest it all in the Canadian Banks, and be done with it.  With dividends they double every 4-5 years or so.

[xazp]

Something possibly notable though it may not be immediately connected to the banks  http://online.wsj.com/articles/fico-recalibrates-its-credit-scores-1407443549?mod=WSJ_hp_LEFTWhatsNewsCollection

 

FICO is basically recalibrating their scores "upward."  I believe that the risk weightings applies to capital rules depend on FICO.  In particular, you may see a chunk of "high risk weight" loans on BAC and C's books, get recalibrated to lower risk weights.  Which would make their capital ratios move upward for "free." 

 

Alertmeipp:

 

While it feels like big $ litigation never ends, you also got to remember all of these big $ costs are coming from the financial crisis.  That's probably a once-in-a-generation event.  Sure DOJ may sue over some smaller issue, but, these multi-billion settlements are a function of a real disaster in the financial markets that (I think) won't happen for another 20 years or whatever. 

[Liberty]

Lol. Most high end buys in Canada are cash buys. And even mortgage ones have good down payment. Looks quite.different from USA and Ireland.

 

Lol?

 

I'm in Canada and I've been watching RE pretty closely. We're pretty much as bad as other RE bubbly countries of the past in our own special ways (history never repeats exactly, but it sure rhymes). Who knows about timing, but I certainly know house prices have lost contact with reality long ago, that income haven't kept up and people are piling on debt, buying million dollar crack shacks in Vancouver and over-supplied small concrete boxes in Toronto, and that it won't end well.

 

http://i.imgur.com/a53qo9o.png

 

http://i.imgur.com/YBqsya1.jpg

[Liberty]

What do you mean that Canadian banks are "protected?"

 

I'm not him, but I'm guessing he meant protected from competition; pretty much an oligopoly composed of a small number of big banks with almost no new entrants.

[gary17]

 

Lots of luck?

 

Bubble needs leverage and a catalyst to burst.

 

Do you see leverage and what could be the catalyst?

 

Lol. Most high end buys in Canada are cash buys. And even mortgage ones have good down payment. Looks quite.different from USA and Ireland.

 

Lol?

 

I'm in Canada and I've been watching RE pretty closely. We're pretty much as bad as other RE bubbly countries of the past in our own special ways (history never repeats exactly, but it sure rhymes). Who knows about timing, but I certainly know house prices have lost contact with reality long ago, that income haven't kept up and people are piling on debt, buying million dollar crack shacks in Vancouver and over-supplied small concrete boxes in Toronto, and that it won't end well.

 

http://i.imgur.com/a53qo9o.png

 

http://i.imgur.com/YBqsya1.jpg

[Uccmal]

What do you mean that Canadian banks are "protected?"

 

I'm not him, but I'm guessing he meant protected from competition; pretty much an oligopoly composed of a small number of big banks with almost no new entrants.

 

That is correct.  They are protected by ownership legislation.  In return, they employ a certain number of people.  Operational socialism.

 

 

[alertmeipp]

 

Lots of luck?

 

Bubble needs leverage and a catalyst to burst.

 

Do you see leverage and what could be the catalyst?

 

Lol. Most high end buys in Canada are cash buys. And even mortgage ones have good down payment. Looks quite.different from USA and Ireland.

 

Lol?

 

I'm in Canada and I've been watching RE pretty closely. We're pretty much as bad as other RE bubbly countries of the past in our own special ways (history never repeats exactly, but it sure rhymes). Who knows about timing, but I certainly know house prices have lost contact with reality long ago, that income haven't kept up and people are piling on debt, buying million dollar crack shacks in Vancouver and over-supplied small concrete boxes in Toronto, and that it won't end well.

 

http://i.imgur.com/a53qo9o.png

 

http://i.imgur.com/YBqsya1.jpg

 

Hard to say when but clearly out of whack.

 

All I know is all those realtors are making a killing on this. 4% on a million house is 40k, sometimes, for a few days of work.

 

I would rather lose money in stocks. :)

[Uccmal]

Liberty, I didn't want to reproduce all your charts but did want to reply.  We are way off topic.  Real estate prices seem high in Canada but the leverage situation is not being borne by our big 5/6. 

 

Have you ever tried to get a Line of Credit from any of them, or a mortgage.  For a Heloc which was more than covered by the home value we had to provide pay check paperwork, employment records, mortgage records, essentially the whole enchilada.  Same with the mortgage 10 years ago. 

 

The debt must be sitting somewhere else with other finance companies. 

 

I have also noticed that Toronto prices have settled down some this year. 

 

Anyways, I was being facetious.  Being a frustrated value investor, at the moment, brings that out.

[Liberty]

 

Lots of luck?

 

Bubble needs leverage and a catalyst to burst.

 

Do you see leverage and what could be the catalyst?

 

There's tons of leverage. Look at the all-time high household debt levels. Look at HELOC growth. Look at the size of RE in the canadian economy, look at home ownership levels vs historical, look at where incomes and rents are VS house prices. Ask yourself why houses cost almost twice as much in Canada as in the US, especially with the tepid canadian economy. Look at who the marginal buyers are. Look at how little people have invested elsewhere than in their houses (lots of almost empty RSPs and TFSAs, baby boomers selling to fund their retirements). Look at how HGTV and RE shows on TV have multiplied and become a national pastime. Look into the moves that the government has been making in the past few years trying to cool things down (you used to be able to buy with 0% down and 40 years amortization a few years ago, and with the popular cash-back mortgages with first time buyers, some people start with negative equity).

 

Catalyst can be almost anything (recession, interest rates rising, commodity cycle, China troubles, US troubles, etc) that leads to a change of sentiment. As long as people believe house prices never go down, they'll keep piling debt and think "better buy now, it'll just be more expensive later". the fact that Canada did relatively well in 2008 only made things worse, because people went "see, it can't happen here, we're immune". But the market already has started softening in parts of the country, and at some point sentiment will turn, and when that happens it can move quickly.

 

I'm not shorting banks or whatever so I have no opinion on timing, but I'm happy to rent until things become more rational (when the toronto RE market crashed in the late 80s, it took something like 14 years to get back to its peak... but this time it's not just toronto, it's almost everywhere).

 

This gives an overview of what's going on, except that things have gotten a bit worse since this was written:

 

http://www.greaterfool.ca/2012/01/08/in-the-end/

[Liberty]

The banks are off-loading a lot to CMHC, but if the excrements hit the fan, I don't think the government will just let taxpayers be on the hook for everything (how many votes do you win that way?). They'll find a way to put a lot of pain on the banks. IMO.

 

But yes, we are getting off topic. We can continue this in the Canadian RE thread if anyone's interested.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/garth-turner-greaterfool/