BAC-WT - Bank of America Warrants

[xazp]

I agree that there's something else embedded in their estimates other than the interest rate rise.  100bps rise is about 3.2Bn pre-tax, so they're really saying maybe $1.75 in earnings without a shift in interest rates.  So perhaps there's 25c in operational improvements in their estimate, and 25c from the interest rate rise? 

 

I hope after the DOJ settles, that BAC can do an investor day presentation laying out their plans.  The last 6 years have largely been crisis management, but eventually the bank normalizes and then hopefully improves the bank.  I mean, 1% ROA is fine in the next few years, but what is their target longer term?

 

I think they commented 14% ROTE / 1% ROA assuming a 100bps parallel rise.  So I'm somewhat calibrating with his comments here ($2/share after an interest rate rise). 

 

He said 13% to 14% last Nov-Dec during the Q&A (recorded audio was once on the website) at an investor conference.  He specifically said it was for the "present" interest rate environment, I posted it here (it's buried somewhere in this thread), and then Sanjeev posted that he agreed with me that Moynihan did indeed say it.

 

Of course, the most recent comment is a better one because there is always a chance that he's simply changed his mind.

 

The difference between 10.7% ROTE and 14% ROTE is 3.3% (330 bps of ROTE)

 

Just eyeballing it, that feels like way too large of a move to be coming from a 100 bps parallel rise.

[xazp]

I don't know :). 

 

Right now, they're charging off about $1.3Bn/quarter.  They've got $15.8Bn in reserves.  So at the present pace of charge-offs they've got 3 years of reserves which is high. 

 

But reserves are also there to protect against future up-ticks in delinquencies.  Reserves may rise when loan growth ticks up.  It's complicated and I don't know the answer.  I'm not sure Moynihan knows either.  I just know, unless BAC is truly in run-off, that reserves can not decline to anything like zero, so they aren't provisioning anything like a normalized rate. 

 

As Eric says, this is offset by a bunch of costs that are above normal, and (my opinion) is it works out to $1.50/share or so.  I'm going to guess various operational improvements adds about 25c/share in the next 2 years, and interest rates add another 25c/share, so say Q3 2016, we'll be at a $2/share run-rate. 

 

 

 

Their reserves for loan losses are down by about $5.4Bn y/y.  They can't keep dropping reserves forever, the number can't go anywhere near zero, or negative.  So there's some limit to how much of this they can do. 

 

Xazp, why do you think the provision level is not sustainable, and how would you arrive at the correct provision level?

 

Gotcha, so how would you suggest calculating the normal level of provisions or the reserves?

[ERICOPOLY]

The government would be much happier to have a lot of tiny, regionally-exposed, heavily leveraged banks instead of having the deposits concentrated among a few less-leveraged, regionally-diversified mega-banks.

 

So just give them what they want.  Split BAC into 30 pieces and lever the crap out of each piece.  We can then have the next banking crisis look more like the 1930s again  :D

[xazp]

Are you sure?  It takes a lot less effort to fine $20Bn from one large company versus $750MM from each of 30 small companies.  :P. 

 

I actually suspect that spin-offs or IPOing some units would create shareholder value.  It's funny how investment banks pitch this idea to other companies all the time, but never do it themselves.  In particular,  spin-offs/IPOs would drop BAC's capital requirements and lower the tension with the Fed.  Surely they can find parts of the business that don't really interact with others that can just be sent off? 

 

 

 

The government would be much happier to have a lot of tiny, regionally-exposed, heavily leveraged banks instead of having the deposits concentrated among a few less-leveraged, regionally-diversified mega-banks.

 

So just give them what they want.  Split BAC into 30 pieces and lever the crap out of each piece.  We can then have the next banking crisis look more like the 1930s again  :D

[ERICOPOLY]

Are you sure?  It takes a lot less effort to fine $20Bn from one large company versus $750MM from each of 30 small companies.  :P. 

 

It solves the moral hazard.

 

Tiny banks are the ones that draw on the FDIC's reserves when they fail.

 

The big banks pay a lot of money towards establishing those FDIC reserves.

 

You can see where this is leading...  the small banks aren't paying their own fare.  This interference with the free market creates moral hazard.

 

[ERICOPOLY]

I agree that there's something else embedded in their estimates other than the interest rate rise.  100bps rise is about 3.2Bn pre-tax, so they're really saying maybe $1.75 in earnings without a shift in interest rates.  So perhaps there's 25c in operational improvements in their estimate, and 25c from the interest rate rise? 

 

Now... let's assume that interest rates stay here forever and the 100bps rise never happens...

 

Translation is that at 10x earnings, BAC should be trading at $17.50 less the amount that earnings come in light over the next two years.  So $17 worst case, but if you average the progress it's more like $17.25.

 

Or $20.70 at 12x earnings.  So that would be my range of selling if taxes were not an issue.  Somewhere between $17.25 and $20.70.

 

Every other banks (WFC, JPM, etc) will also celebrate the 100bps rise.  So my thinking is BAC is worth staying in for the return to 13% ROTE under present interest rates.

 

[ERICOPOLY]

I think many of us here agree the intrinsic value is higher.... so what would be the catalyst? I think without one it could sit at the 15$ level for a while.

 

It's like you are hunting a sitting duck.  When will it take wing?

 

You can't legally shoot a duck unless it is in flight.  It was flying early this year but then it landed again and here we are  >:(

[xazp]

A rising tide lifts all boats, but, it appears to lift the lower-boats more.  The earnings uplift (as % of current earnings) is greater for BAC.  If everyone makes $3Bn more and their market caps go up $30Bn, you should prefer BAC over WFC or JPM. 

 

 

 

I agree that there's something else embedded in their estimates other than the interest rate rise.  100bps rise is about 3.2Bn pre-tax, so they're really saying maybe $1.75 in earnings without a shift in interest rates.  So perhaps there's 25c in operational improvements in their estimate, and 25c from the interest rate rise? 

 

Now... let's assume that interest rates stay here forever and the 100bps rise never happens...

 

Translation is that at 10x earnings, BAC should be trading at $17.50 less the amount that earnings come in light over the next two years.  So $17 worst case, but if you average the progress it's more like $17.25.

 

Or $20.70 at 12x earnings.  So that would be my range of selling if taxes were not an issue.  Somewhere between $17.25 and $20.70.

 

Every other banks (WFC, JPM, etc) will also celebrate the 100bps rise.  So my thinking is BAC is worth staying in for the return to 13% ROTE under present interest rates.

[xazp]

I'm a little more bullish than you. 

 

Let's imagine a company called "lazy BAC" where interest rates do not rise, and they simply earn $19Bn/year ($1.70 * 11.1Bn shares).  Lazy BAC is not interested in improving the organization in any way, they just want to coast at that level.

 

Well lazy BAC should be able to return all of their earnings to shareholders, i.e. $19Bn/year.  If one assumes this is all dividends, even at a 8% dividend yield, that would be a $240Bn company or about 50% higher than today, and you'd still be getting an 8% dividend each year. 

 

 

Now... let's assume that interest rates stay here forever and the 100bps rise never happens...

 

Translation is that at 10x earnings, BAC should be trading at $17.50 less the amount that earnings come in light over the next two years.  So $17 worst case, but if you average the progress it's more like $17.25.

 

Or $20.70 at 12x earnings.  So that would be my range of selling if taxes were not an issue.  Somewhere between $17.25 and $20.70.

 

Every other banks (WFC, JPM, etc) will also celebrate the 100bps rise.  So my thinking is BAC is worth staying in for the return to 13% ROTE under present interest rates.

[ERICOPOLY]

I'm a little more bullish than you. 

 

Let's imagine a company called "lazy BAC" where interest rates do not rise, and they simply earn $19Bn/year ($1.70 * 11.1Bn shares).  Lazy BAC is not interested in improving the organization in any way, they just want to coast at that level.

 

Well lazy BAC should be able to return all of their earnings to shareholders, i.e. $19Bn/year.  If one assumes this is all dividends, even at a 8% dividend yield, that would be a $240Bn company or about 50% higher than today, and you'd still be getting an 8% dividend each year. 

 

 

Now... let's assume that interest rates stay here forever and the 100bps rise never happens...

 

Translation is that at 10x earnings, BAC should be trading at $17.50 less the amount that earnings come in light over the next two years.  So $17 worst case, but if you average the progress it's more like $17.25.

 

Or $20.70 at 12x earnings.  So that would be my range of selling if taxes were not an issue.  Somewhere between $17.25 and $20.70.

 

Every other banks (WFC, JPM, etc) will also celebrate the 100bps rise.  So my thinking is BAC is worth staying in for the return to 13% ROTE under present interest rates.

 

I suppose that's 12.5x earnings versus the high 12x end of my range.  I don't disagree, since I pulled the 12x out of thin air and the two are largely the same.

 

I sometimes talk about 10x but I can't see it lasting at 10x forever -- it's just too easy to compound money at 10% when you have 10x in such a low-leveraged (relative to a small bank) heavily regulated utility like this.  People will leverage it and make a much better return than that -- so that kind of mentality should support something like 12.5x eventually.

[Uccmal]

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates. 

[xazp]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

[Uccmal]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

 

I have never counted the NOLs either.  I went through the most recent 10Q looking for a quantification but didn't find it.  Its probably buried in the 10 k somewhere. 

[Andy Dufresne]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

 

I have never counted the NOLs either.  I went through the most recent 10Q looking for a quantification but didn't find it.  Its probably buried in the 10 k somewhere.

 

 

10-K page 255 (I d/l the report from the investor relations part of the website) provides both the DTA and the Net DTA post valuation allowance. I'm using the Net DTA just to be conservative:

 

US NOLs 3.06 bn

UK NOLs 7.42 bn

Other Non-US NOLs 0.12 bn

US States NOLs 1.01 bn

General Business credits 4.03 bn

Foreign Tax Credits 5.38 bn

 

Total 21.02 bn

 

FTCs begin expiring in 2017; NOLs - some in 2027, some never (in the UK)

 

Valuation allowance is around 1.6 bn

 

So, if BAC's theoretical tax rate is 35% and we assume 19 bn profit, each year you get almost 7 bn of NOLs you can use to shield, which would mean finishing them off in 3 years if BAC could completely avoid taxes. Assuming it takes six beginning in 2014 (i.e. 3.5 bn) and still disregarding the valuation allowance, the PV of the NOLs at the 10.7% cost of capital Eric calculated is roughly 15 bn USD, or about 1.42 USD/share. Of course this is before the NOLs they will get for the DOJ settlement, but we'll have to wait for the numbers on that to figure our what the NOLs will be worth.

 

 

 

 

 

[ERICOPOLY]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

 

I have never counted the NOLs either.  I went through the most recent 10Q looking for a quantification but didn't find it.  Its probably buried in the 10 k somewhere.

 

 

10-K page 255 (I d/l the report from the investor relations part of the website) provides both the DTA and the Net DTA post valuation allowance. I'm using the Net DTA just to be conservative:

 

US NOLs 3.06 bn

UK NOLs 7.42 bn

Other Non-US NOLs 0.12 bn

US States NOLs 1.01 bn

General Business credits 4.03 bn

Foreign Tax Credits 5.38 bn

 

Total 21.02 bn

 

FTCs begin expiring in 2017; NOLs - some in 2027, some never (in the UK)

 

Valuation allowance is around 1.6 bn

 

So, if BAC's theoretical tax rate is 35% and we assume 19 bn profit, each year you get almost 7 bn of NOLs you can use to shield, which would mean finishing them off in 3 years if BAC could completely avoid taxes. Assuming it takes six beginning in 2014 (i.e. 3.5 bn) and still disregarding the valuation allowance, the PV of the NOLs at the 10.7% cost of capital Eric calculated is roughly 15 bn USD, or about 1.42 USD/share. Of course this is before the NOLs they will get for the DOJ settlement, but we'll have to wait for the numbers on that to figure our what the NOLs will be worth.

 

It's a nice margin of safety...  "unexpected" greater-than-normalized fines can be paid out of this time-release slush fund of NOLs.

[Spekulatius]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

 

I have never counted the NOLs either.  I went through the most recent 10Q looking for a quantification but didn't find it.  Its probably buried in the 10 k somewhere.

 

 

10-K page 255 (I d/l the report from the investor relations part of the website) provides both the DTA and the Net DTA post valuation allowance. I'm using the Net DTA just to be conservative:

 

US NOLs 3.06 bn

UK NOLs 7.42 bn

Other Non-US NOLs 0.12 bn

US States NOLs 1.01 bn

General Business credits 4.03 bn

Foreign Tax Credits 5.38 bn

 

Total 21.02 bn

 

FTCs begin expiring in 2017; NOLs - some in 2027, some never (in the UK)

 

Valuation allowance is around 1.6 bn

 

So, if BAC's theoretical tax rate is 35% and we assume 19 bn profit, each year you get almost 7 bn of NOLs you can use to shield, which would mean finishing them off in 3 years if BAC could completely avoid taxes. Assuming it takes six beginning in 2014 (i.e. 3.5 bn) and still disregarding the valuation allowance, the PV of the NOLs at the 10.7% cost of capital Eric calculated is roughly 15 bn USD, or about 1.42 USD/share. Of course this is before the NOLs they will get for the DOJ settlement, but we'll have to wait for the numbers on that to figure our what the NOLs will be worth.

 

What are the NOL in the UK worth? Do they actually have enough earnings to make 7B$ in the Uk in the foreseeable future? How did they loose 7B$ there to begin with?

[ERICOPOLY]

Yes that is correct.  But that additional capital/cash coming in, I'm using that as my margin of safety with the expectation that the government will simply ratchet up the stress tests or capital limits over time.

 

I hope it is not so :).  But, BAC hasn't really been anywhere near the capital returns I had hoped for. 

 

Interesting estimates, tx. 

 

BAC reports their GAAP earnings using an estimated tax rate at the moment.  Am I correct that the tax rate estimated does not include NOL carry forwards?  I believe I am.  Therefore the incoming cash for the foreseeable future is higher than the headline EPS number for the foreseeable future. 

 

Since the losses stem from the mortgage and mortgage bond subsidiaries they should mostly be harvestable at some point.  This should add to your estimates.

 

I have never counted the NOLs either.  I went through the most recent 10Q looking for a quantification but didn't find it.  Its probably buried in the 10 k somewhere.

 

 

10-K page 255 (I d/l the report from the investor relations part of the website) provides both the DTA and the Net DTA post valuation allowance. I'm using the Net DTA just to be conservative:

 

US NOLs 3.06 bn

UK NOLs 7.42 bn

Other Non-US NOLs 0.12 bn

US States NOLs 1.01 bn

General Business credits 4.03 bn

Foreign Tax Credits 5.38 bn

 

Total 21.02 bn

 

FTCs begin expiring in 2017; NOLs - some in 2027, some never (in the UK)

 

Valuation allowance is around 1.6 bn

 

So, if BAC's theoretical tax rate is 35% and we assume 19 bn profit, each year you get almost 7 bn of NOLs you can use to shield, which would mean finishing them off in 3 years if BAC could completely avoid taxes. Assuming it takes six beginning in 2014 (i.e. 3.5 bn) and still disregarding the valuation allowance, the PV of the NOLs at the 10.7% cost of capital Eric calculated is roughly 15 bn USD, or about 1.42 USD/share. Of course this is before the NOLs they will get for the DOJ settlement, but we'll have to wait for the numbers on that to figure our what the NOLs will be worth.

 

What are the NOL in the UK worth? Do they actually have enough earnings to make 7B$ in the Uk in the foreseeable future? How did they loose 7B$ there to begin with?

 

Are there creative ways to manufacture gains in certain tax jurisdictions?

 

Like suppose I have a securities portfolio within an American subsidiary that I want to write covered calls on.  But I also own a subsidiary in the UK.  So instead of writing the covered calls in the American subsidiary, I write naked calls in the UK subsidiary.  They are far out-of-the money and generally speaking will almost certainly expire for a taxable gain in the UK.  Netted out though, including both subsidiaries, it is effectively a covered call in the aggregate. 

 

That's just a simplistic example.  The bank has a large derivatives book and I'm wondering if they can play creative games, or whether this is strictly disallowed and viewed as some sort of a tax fraud.

[Andy Dufresne]

Spekulatius

 

The answer is that they expect more than a 50% chance of having such offsetting income otherwise under GAAP they would be required to establish a valuation allowance, which you can see they have for other DTAs.

 

Check out p.121 of the 10-K, its towards the end of the MD&A in the Accrued Income Taxes and DTAs section where they state this explicitly.

 

I do not know how they got 7 bn of NOLs in the UK, which is why I assumed it would take double the time to realize these, but even without them, BAC should still have 10 bn in realizable NOLs BEFORE the NOLs that will be created by the DOJ settlement and, I forgot to state in the earlier post, the FHFA settlement which was after the annual report.

[morningstar]

Spekulatius

 

The answer is that they expect more than a 50% chance of having such offsetting income otherwise under GAAP they would be required to establish a valuation allowance, which you can see they have for other DTAs.

 

Check out p.121 of the 10-K, its towards the end of the MD&A in the Accrued Income Taxes and DTAs section where they state this explicitly.

 

I do not know how they got 7 bn of NOLs in the UK, which is why I assumed it would take double the time to realize these, but even without them, BAC should still have 10 bn in realizable NOLs BEFORE the NOLs that will be created by the DOJ settlement and, I forgot to state in the earlier post, the FHFA settlement which was after the annual report.

 

The UK NOLs basically come from Merrill Lynch International, which booked a large amount of its toxic CDS losses through London.

[xazp]

Spek - so, BAC has moved big huge chunks of derivatives to the UK for the purpose of chewing through those tax assets.  See:  http://www.cnbc.com/id/100411179

$7Bn of tax credits ~$28Bn of pre-tax income. 

 

Global markets is about $1.6Bn/quarter, say half goes through london, so $800MM/quarter pre-tax. 

They also have a decent sized U.K. credit card business too. 

Call U.K. $1Bn/quarter in pre-tax earnings?  So 7 years to clear through it?  (the UK tax carryforwards never expire, so, eventually it will be gone - the question is how long it will take). 

 

 

 

 

 

 

 

What are the NOL in the UK worth? Do they actually have enough earnings to make 7B$ in the Uk in the foreseeable future? How did they loose 7B$ there to begin with?

[xazp]

Another comment.  Most businesses are not capable of paying out 100% of earnings without eventually dying off.  So for example if Ford or Intel stops paying for new factories or developing new products, or a retailer stops refurbishing stores, or Exxon stops buying properties etc -- eventually these companies will lose all their business.  But this isn't really true with a bank, I mean there's some minor cap-x, but for the most part, the profits from a loan can be kicked back to shareholders, and a new loan issued.  Their main value is in the cash, and that's not depreciating the way other property, equipment, etc, depreciates. 

 

I don't think there's anything preventing them from paying out all of their earnings for many years in a row - but that would be a problem for many other companies. 

 

 

 

I suppose that's 12.5x earnings versus the high 12x end of my range.  I don't disagree, since I pulled the 12x out of thin air and the two are largely the same.

 

I sometimes talk about 10x but I can't see it lasting at 10x forever -- it's just too easy to compound money at 10% when you have 10x in such a low-leveraged (relative to a small bank) heavily regulated utility like this.  People will leverage it and make a much better return than that -- so that kind of mentality should support something like 12.5x eventually.

[ni-co]

I'm a little more bullish than you. 

 

Let's imagine a company called "lazy BAC" where interest rates do not rise, and they simply earn $19Bn/year ($1.70 * 11.1Bn shares).  Lazy BAC is not interested in improving the organization in any way, they just want to coast at that level.

 

Well lazy BAC should be able to return all of their earnings to shareholders, i.e. $19Bn/year.  If one assumes this is all dividends, even at a 8% dividend yield, that would be a $240Bn company or about 50% higher than today, and you'd still be getting an 8% dividend each year. 

 

 

Now... let's assume that interest rates stay here forever and the 100bps rise never happens...

 

Translation is that at 10x earnings, BAC should be trading at $17.50 less the amount that earnings come in light over the next two years.  So $17 worst case, but if you average the progress it's more like $17.25.

 

Or $20.70 at 12x earnings.  So that would be my range of selling if taxes were not an issue.  Somewhere between $17.25 and $20.70.

 

Every other banks (WFC, JPM, etc) will also celebrate the 100bps rise.  So my thinking is BAC is worth staying in for the return to 13% ROTE under present interest rates.

 

I suppose that's 12.5x earnings versus the high 12x end of my range.  I don't disagree, since I pulled the 12x out of thin air and the two are largely the same.

 

I sometimes talk about 10x but I can't see it lasting at 10x forever -- it's just too easy to compound money at 10% when you have 10x in such a low-leveraged (relative to a small bank) heavily regulated utility like this.  People will leverage it and make a much better return than that -- so that kind of mentality should support something like 12.5x eventually.

 

Here is my back of the envelope thinking: 13% on $15/share in tangible equity is ~$20bn. I assume that BAC is going to grow it together with the economy and inflation at a rate of 7% per year for the next 4 years to $26bn or $2.50 per share. Give this a still below market multiple of 14 and it's not a big stretch to assume that the share price in January 2019 could be $35.

 

In the meantime BAC pays $0.20 dividend per year which I'm going to increase by 7% per year, too. That's all I assume in terms of returning capital to shareholders (which also increases my confidence in the $35 share price). In sum, this is going be around ~$1 in dividends until January 2019, which will lower the strike price of my A warrants to $12.30.

 

So in January 2019, the warrants are going to be worth ~$22.70 ($35-$12.30). I buy them for $6.75 today. That's around 235% in 4 years or 35% per year.

 

(I don't know whether this has been mentioned here, but it dawned on me that because of the strike price adjustments for the A warrants you essentially get the dividend "tax free".)

[ERICOPOLY]

(I don't know whether this has been mentioned here, but it dawned on me that because of the strike price adjustments for the A warrants you essentially get the dividend "tax free".)

 

US taxpayers owe the dividend tax anyway, even though it's a non-cash adjustment.  It also raises the cost basis for US taxpayers, so they don't get it taxed a second time later on as a capital gain.

[ERICOPOLY]

Give this a still below market multiple of 14 and it's not a big stretch to assume that the share price in January 2019 could be $35.

 

I find it not too difficult to get your $15.20 invested today up to $35 in 4.5 years, but I find it harder to predict if the share price itself will get that high (because it depends on how much is paid out in dividends).  But since you are in the warrants, it's more relevant to ignore share price and instead focus on whether the $15.20 of total invested dollars can rise to $35.

 

Assuming 13% ROTE and today's $14 of tangible equity per share, then it's $1.80 per share.

 

Today the shares are $15.20.

 

Assume shares quickly trade at $18 once large capital returns begin (PE of 10x).  Ignoring the NOLs and such (assume they get eaten by legal expenses), further assume that all after-tax earnings are returned to shareholders (through dividends and buybacks).  Assume the shares trade at 10x earnings throughout this period.

 

Okay, so just compound $18 at 10% for 4.5 years.  You get $27.64.

 

So for you (at that point) to get to $35 of total gain per initial $15.20 invested, you then need (in 2019 but not before then) the shares to trade up to 12.6x earnings.

 

So that's the scenario where it trades at 10x for the whole period, and then gets a sudden boost to 12.6x at the end.

 

However... if it instead trades up to 12.5x earnings right away and dividends+buybacks are reinvested at that multiple, then the total value only rises to $32 per share.  I'm fine with this scenario because it means the bulk of the contribution to the annualized compounding rate (multiple expansion) is front-loaded and I don't turn fast money down when it just falls into my lap.

 

 

[gary17]

 

I guess I'm the only person here who thinks BAC should be at $20 at year end.... I have no reason to believe how it will get there but just seems like a reasonable market price once all the dusts settle down.

 

 

Give this a still below market multiple of 14 and it's not a big stretch to assume that the share price in January 2019 could be $35.

 

I find it not too difficult to get your $15.20 invested today up to $35 in 4.5 years, but I find it harder to predict if the share price itself will get that high (because it depends on how much is paid out in dividends).  But since you are in the warrants, it's more relevant to ignore share price and instead focus on whether the $15.20 of total invested dollars can rise to $35.

 

Assuming 13% ROTE and today's $14 of tangible equity per share, then it's $1.80 per share.

 

Today the shares are $15.20.

 

Assume shares quickly trade at $18 once large capital returns begin (PE of 10x).  Ignoring the NOLs and such (assume they get eaten by legal expenses), further assume that all after-tax earnings are returned to shareholders (through dividends and buybacks).  Assume the shares trade at 10x earnings throughout this period.

 

Okay, so just compound $18 at 10% for 4.5 years.  You get $27.64.

 

So for you (at that point) to get to $35 of total gain per initial $15.20 invested, you then need (in 2019 but not before then) the shares to trade up to 12.6x earnings.

 

So that's the scenario where it trades at 10x for the whole period, and then gets a sudden boost to 12.6x at the end.

 

However... if it instead trades up to 12.5x earnings right away and dividends+buybacks are reinvested at that multiple, then the total value only rises to $32 per share.  I'm fine with this scenario because it means the bulk of the contribution to the annualized compounding rate (multiple expansion) is front-loaded and I don't turn fast money down when it just falls into my lap.