BAC-WT - Bank of America Warrants

[mankap]

Lot of people are thinking that BAC's earnings will not improve until rates go up. I do not know if it is right or wrong.

Every qtr you start thinking that we will see loan growth but it does not happen.

I do not know if the reason is low interest rates or BAC does not want to increase the loan book.

[oddballstocks]

Lot of people are thinking that BAC's earnings will not improve until rates go up. I do not know if it is right or wrong.

Every qtr you start thinking that we will see loan growth but it does not happen.

I do not know if the reason is low interest rates or BAC does not want to increase the loan book.

 

Banks that have no loan growth are claiming rates are the problem.  Yet there are a LOT of other banks experiencing loan growth and they cite the recovery for it.

 

Maybe it's a bit like investment managers.  In up years you talk about your performance and in down years your process.

[Junto]

BAC does not want to increase the loan book.

 

Not sure how much of it is cleaning up sins of past versus new loan volume. In banking sometimes you go backwards before you go forwards when cleaning up loan books. I don't think anyone wants to aggressively grow a loan book in a historically low rate environment, interest rate risk there for both the bank and the borrower (i.e. if rates adjust in five yrs, can the business/individual handle it).

 

I am still very long BAC, and have been for several years now, although deflation concerns are now tempering how bullish I once was.

 

 

[Vish_ram]

Lot of people are thinking that BAC's earnings will not improve until rates go up. I do not know if it is right or wrong.

Every qtr you start thinking that we will see loan growth but it does not happen.

I do not know if the reason is low interest rates or BAC does not want to increase the loan book.

 

Banks that have no loan growth are claiming rates are the problem.  Yet there are a LOT of other banks experiencing loan growth and they cite the recovery for it.

 

Maybe it's a bit like investment managers.  In up years you talk about your performance and in down years your process.

 

 

You dont even need loan growth. Keep loans flat. The NIM should go back to mean.

 

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Xkq

 

Overall, at macro level, I dont see any decline in loan growth.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Xku

 

It is just that NIM is the millstone around Bank's neck

[Picasso]

Lot of people are thinking that BAC's earnings will not improve until rates go up. I do not know if it is right or wrong.

Every qtr you start thinking that we will see loan growth but it does not happen.

I do not know if the reason is low interest rates or BAC does not want to increase the loan book.

 

Banks that have no loan growth are claiming rates are the problem.  Yet there are a LOT of other banks experiencing loan growth and they cite the recovery for it.

 

Maybe it's a bit like investment managers.  In up years you talk about your performance and in down years your process.

 

I don't know why but this made me laugh.  Certain managers or businesses always make excuses why they couldn't perform and yet you have others in the same industry that manage to get it done.  Size and a near death experience for BAC probably doesn't help. 

[KCLarkin]

It is just that NIM is the millstone around Bank's neck

 

If that is your thesis, why not own WFC or another higher quality name? Part of the thesis has to be that BAC will close the ROE gap with WFC. I guess if you are certain that NIM will increase, you will get higher leverage from current BAC.

[ERICOPOLY]

The $15 price is $9 below a 12x valuation on $2 normalized earnings.

 

So it's like the market believes BAC will earn (on average) less than $1 a year for the first 9 years on the road to normalization.

 

Or 7 years at an 11x valuation.

Or 5 years at a 10x valuation.

 

And that's not the extent of it (the discount is a lot larger than that if you account for the time value of money -- $1 shortfall in 5 years is worth a lot less than $1 today).

 

[KCLarkin]

The $15 price is $9 below a 12x valuation on $2 normalized earnings.

 

Sorry to revisit this but I am starting to lose faith in the $2 EPS.

 

Current earnings are running at $1.00 per year. Where is the $1 gap coming from?

[ERICOPOLY]

The $15 price is $9 below a 12x valuation on $2 normalized earnings.

 

Sorry to revisit this but I am starting to lose faith in the $2 EPS.

 

Current earnings are running at $1.00 per year. Where is the $1 gap coming from?

 

normalized.

[LC]

If you think a good bank can earn 1% on assets:

 

9/30/14

Assets: 2.1 trillion

 

1% earned: 21 billion

 

Shares outstanding: 10.5 billion

 

EPS: $2

[rkbabang]

If you think a good bank can earn 1% on assets:

 

9/30/14

Assets: 2.1 trillion

 

1% earned: 21 billion

 

Shares outstanding: 10.5 billion

 

EPS: $2

 

Which doesn't take into account any share buy backs along the way.

 

[ERICOPOLY]

$1 per year is 6.93% return on tangible common equity.  $2 is 13.86%.  Hardly a lofty goal for a normalized environment years from now when they've regrown their loan books and the legacy issues are completely scrubbed off.

 

It is recency bias to conclude that last quarter, last year, etc... was in any way indicative of what normalization looks like.

 

Same with expectations for this year and next year.

 

A hypothetical cumulative $5 earnings shortfall until we get there is exactly that... just a $5 earnings shortfall.  It decreases the value of the shares by less than that amount due to the discounting of those earnings back to the present.  That would get us to greater than $19 per share if 12x earnings.  We've got approximately twice that discount today.

 

[kevin4u2]

Not sure if anyone else saw this yet. 

 

Matt O’Connor - Deutsche Bank

The capital ratios grew more than expected. Obviously the decline in rates helped the positive earnings, and you mentioned the DTA consumption. As we think about 2015 and the drivers of capital, is it more of the same? Or is there, call it, optimization overall? Not just the loan runoff that you address, but as we think about -- you've had Final Rules for the last few months; there are still some adjustments to the business throughout. How should we think about the capital build? And if you have an estimate for 2015, that would be interesting as well?

Bruce Thompson - CFO

Sure, we’re not going to provide an estimate but what I’d say is that as you look at overall capital levels, if you start with the numerator, as we project out and look at the earnings stream, we think that at least through '15 and possibly into the first part of '16 that on average you can have some quarterly bounces around based on timing and payments but that generally we should accrete capital over the course of at least four and up to six quarters largely based on the pre-tax earnings for the company as oppose to the after-tax earnings and that’s what you saw during the fourth quarter. The other thing numerator as I referenced that, there is if we were to snap a quarter today there would be OCI benefit from the downward movement in rates, as it relates to what we’re seeing under risk weighted asset side, I’d say generally we continue to benefit although it declines a little bit each period. We continue to benefit from the run off of some of the global markets position that would have been put on in the 2005 to 2008 time frame that they tended to have tenures of seven to 10 years. In addition to that as we continue to have payoffs and as we continue to move out some of the comfort consumer real estate assets and put higher quality real estate assets on that are better credit borrowers while the asset levels may stay comparable, you do have an RWA pick up from that as well.

[KCLarkin]

$1 per year is 6.93% return on tangible common equity.  $2 is 13.86%.  Hardly a lofty goal for a normalized environment years from now when they've regrown their loan books and the legacy issues are completely scrubbed off.

 

It is recency bias to conclude that last quarter, last year, etc... was in any way indicative of what normalization looks like.

 

Same with expectations for this year and next year.

 

A hypothetical cumulative $5 earnings shortfall until we get there is exactly that... just a $5 earnings shortfall.  It decreases the value of the shares by less than that amount due to the discounting of those earnings back to the present.  That would get us to greater than $19 per share if 12x earnings.  We've got approximately twice that discount today.

 

I am trying to understand the drivers from 7% to 14% ROE. Is it higher interest rates? Lower operating expenses? Lower legacy & legal costs? Fewer bad loans?

[ni-co]

The $15 price is $9 below a 12x valuation on $2 normalized earnings.

 

Sorry to revisit this but I am starting to lose faith in the $2 EPS.

 

Current earnings are running at $1.00 per year. Where is the $1 gap coming from?

 

Asked myself a similar question: How long does it take to get there if you assume that low interest rates will prevail for say 5 years?

[ERICOPOLY]

The $15 price is $9 below a 12x valuation on $2 normalized earnings.

 

Sorry to revisit this but I am starting to lose faith in the $2 EPS.

 

Current earnings are running at $1.00 per year. Where is the $1 gap coming from?

 

Asked myself a similar question: How long does it take to get there if you assume that low interest rates will prevail for say 5 years?

 

It's hard to say, but the present market price suggests a bit less than $1 annually for 10 years and then $2 after that.

 

Banks usually don't have that kind of a discount despite the risk always being there.

[ERICOPOLY]

You ignore the fact that it was levered more than 2.7x on the downside on previous down days.

 

I got it for $6.90 on Dec 18th.  Common was at $17.53. 

 

Common has declined 12.2%

Warrant has declined 17.4%

 

Warrant was leveraged 2.54x at the time, yet loss was only amplified by 1.42x.  The "brake" is the rising put premium in the warrant.  This brake becomes more effective as we get closer and closer to strike.

 

It's now a 15.22% decline for the warrant.

Versus a 13.3% decline for the common.

 

1.14x downside of the common, meanwhile it started off with 2.54x leverage!

 

That's just plumb craziness.

 

[Uccmal]

$1 per year is 6.93% return on tangible common equity.  $2 is 13.86%.  Hardly a lofty goal for a normalized environment years from now when they've regrown their loan books and the legacy issues are completely scrubbed off.

 

It is recency bias to conclude that last quarter, last year, etc... was in any way indicative of what normalization looks like.

 

Same with expectations for this year and next year.

 

A hypothetical cumulative $5 earnings shortfall until we get there is exactly that... just a $5 earnings shortfall.  It decreases the value of the shares by less than that amount due to the discounting of those earnings back to the present.  That would get us to greater than $19 per share if 12x earnings.  We've got approximately twice that discount today.

 

I am trying to understand the drivers from 7% to 14% ROE. Is it higher interest rates? Lower operating expenses? Lower legacy & legal costs? Fewer bad loans?

 

Have you read the conference call transcript or listened to the call?

 

They kind of layout the math there:

- reduction of legacy costs is still going on

- CRES is trending toward zero and will eventually turn profitable. 

- the mortgage market was depressed last year (from Jpm and WFC) as well

- as per Kevin's posted section the capital coming in is closer to the Pre tax number than the EPS

 

People are assuming the status quo will persist.  That is not necessarily the case. 

 

This company has spent years rationalizing its business.  It is vastly different than 5 years ago. 

We know they can generate 100 Billion over 5 years (the fines and settlements) and still grow book value in a terrible economy. 

 

Its going to take patience which is why I am trending toward holding the common stock rather than options or warrants.

[Guest wellmont]

If you think a good bank can earn 1% on assets:

 

9/30/14

Assets: 2.1 trillion

 

1% earned: 21 billion

 

Shares outstanding: 10.5 billion

EPS: $2

 

warrants?

[simplefocus]

The warrants are a no-brainer for me.  Assuming BAC can earn $2 per share before the warrants expire, you are looking at the minimum of $25 per share (more likely $30+ per share).  And the cost of leverage for the warrants is less than < 4% per year.  This is CHEAP.  It doesn't get any better than that.  I'll add more when my money is in my brokerage account. 

 

 

[KCLarkin]

Have you read the conference call transcript or listened to the call?

 

Sorry was trying to cheat. Just read the transcript:

 

Mike Mayo - CLSA

Then a separate question: what are your key financial targets for 2015? I know you've expressed some of your targets, assuming interest rates increase. But if interest rates don't increase, what should investors evaluate you on at the end of 2015? All I had to go on without the higher interest rates is page 42 of the proxy that talks about the PRSUs. It says as long as you get over a 50 basis point ROA you go in the money on the PRSUs. So I'm not sure if I should be looking at the 50 basis point number, or its 80 basis points, 100% in the money, or the 1% number that you've talked about before. But again, assuming rates don't go up, what's your ROA and ROE target for 2015?

 

Brian Moynihan - CEO

Mike, you don’t get specific projections but our goal is to continue to take [indiscernible] level this quarter and driving forward and our view is that based on everything we see as we see the impact of all the work we’re doing plus the rollover to cost base, the reduction of LAS cost, the litigation falling back to kinds of level you saw this quarter you do see this move towards that those long term goals of 1% ROA and 12% return of ample common equity

 

So if Brian knows, he isn't telling us.

[RhubarbXIV]

The warrants are a no-brainer for me.  Assuming BAC can earn $2 per share before the warrants expire, you are looking at the minimum of $25 per share (more likely $30+ per share).  And the cost of leverage for the warrants is less than < 4% per year.  This is CHEAP.  It doesn't get any better than that.  I'll add more when my money is in my brokerage account.

 

I'm not sure how you get to 4% for cost of leverage. With dividends I get somewhere between 8-9%. Even the simplified "Greenblatt method" gets ~7% annualized without dividends or adjusting for paying the premium up front.

 

At $5.86 for warrants, and $15.38 for common I get $2.08 IV/$3.77 TV (or "interest").

 

$3.77/$13.30 strike = 28%

 

roughly 7% annualized, not including dividends or time value of paying interest up front.

 

Am I way off somehow?

[simplefocus]

I was using a simple calculation.  The strike price when the warrants expire will be around $11~ with dividend adjustment. 

 

 

 

 

[ni-co]

The warrants are a no-brainer for me.  Assuming BAC can earn $2 per share before the warrants expire, you are looking at the minimum of $25 per share (more likely $30+ per share).  And the cost of leverage for the warrants is less than < 4% per year.  This is CHEAP.  It doesn't get any better than that.  I'll add more when my money is in my brokerage account.

 

Be careful with your assumptions. You have to think carefully about global macro with this one.

 

The recent quarter showed me that BAC is dependent on rates rising to achieve $2/share. Rising rates has never been part of my investment thesis but only a nice kicker. My thesis was about legal cost dropping off and real earnings showing through. It hasn't worked out so far and I'm not prepared to change this investment into an interest rate bet.

[ERICOPOLY]

The warrants are a no-brainer for me.  Assuming BAC can earn $2 per share before the warrants expire, you are looking at the minimum of $25 per share (more likely $30+ per share).  And the cost of leverage for the warrants is less than < 4% per year.  This is CHEAP.  It doesn't get any better than that.  I'll add more when my money is in my brokerage account.

 

It's not less than 4%.  It's more than 8%.

 

You take today's stock price and subtract off today's warrant price.  The remainder then compounds at what annualized rate for 4 years in order to reach the warrant strike price?  That rate is in excess of 8% annualized.

 

I was using a simple calculation.  The strike price when the warrants expire will be around $11~ with dividend adjustment.

 

You must use today's warrant strike price -- the future dividend-adjusted warrant strike price is completely immaterial to the computation of cost of leverage in the warrant.