jay21 Posted April 22, 2015 Share Posted April 22, 2015 Why does the asset tax go into effect? What kind of drag will that cause? I do agree that the banks are well setup for 15% returns whenever the sewer is cleared. It's a drag on their current capital base but as they have mentioned it gives them the benefit of accruing capital on a pre-tax basis as opposed to post tax (i.e they will generate capital faster) Link to comment Share on other sites More sharing options...
ERICOPOLY Posted April 23, 2015 Share Posted April 23, 2015 Their tangible book went up by 7% over the past year. I think this was driven by lower interest rates which created large gains in their portfolio of debt securities. The gains flowed through to OCI quarterly. However the yield from their bonds remain the same. So you tend to get a lower ROTCE from this -- same yield (same earnings) but, expressed as a smaller percentage of a larger tangible book value per share. So while it looks like Moynihan is changing his % targets, it's sort of out of his control because he can't will the interest rates to go back to the level of a year or so ago when he last said the targets were higher. It's the same amount of earnings either way. Link to comment Share on other sites More sharing options...
tylerdurden Posted April 29, 2015 Share Posted April 29, 2015 Unless we go through a US/Global recession, future should be bright for BofA. (Deflation/Depression kind of risk should be really small.) Recession or very slow growth like in Japan is the only thing that I can think of if you try to kill the stock since balance sheet is really strong and another banking driven crisis should be off the table for a very long time. What is your high level thinking for the normalized earnings power of the company under that type of scenario by 2018 let's say? Do you think $2 EPS and 10x is too optimistic by 2018 in a recessionary or very slow growth type of environment? (Assuming capital return will be also somewhat normalized by then as well.) I know it's anybody's guess perhaps but still am curious about your thoughts... Thanks. Link to comment Share on other sites More sharing options...
gary17 Posted April 30, 2015 Share Posted April 30, 2015 So I calculate the warrant's to be about 7.8% cost now - I have two questions... a) At what % do people feel the warrants are cheap ? ! b) If I buy them today, the cost is 7.8%... but if the commons go up to say $18, I believe the 'cost' of leverage decreases dramatically. What should I make of this? I mean when I paid the cost is 7.8%. But as the commons appreciate, does my cost go down ? Thanks ! Gary 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. Link to comment Share on other sites More sharing options...
TwoCitiesCapital Posted April 30, 2015 Share Posted April 30, 2015 So I calculate the warrant's to be about 7.8% cost now - I have two questions... a) At what % do people feel the warrants are cheap ? ! b) If I buy them today, the cost is 7.8%... but if the commons go up to say $18, I believe the 'cost' of leverage decreases dramatically. What should I make of this? I mean when I paid the cost is 7.8%. But as the commons appreciate, does my cost go down ? Thanks ! Gary 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. Your cost doesn't go down because the cost is paid upfront - just like an option. You actually lose some value on this because as the cost of leverage goes down, it generally means that one of the component pieces of the warrant's price is going down as well. You own the warrant and one of the pieces of the warrant's value is falling. But I doubt you're buying the warrant to arbitrage the cost of leverage. Generally, the hope would be that the return from the rise in the stock would counteract for this and the leveraged returns would still exceed the returns from owning the underlying security. The cost of leverage calculation really only helps you compare buying the warrant to other alternative means of leverage and to know when leverage is cheap. Link to comment Share on other sites More sharing options...
gary17 Posted April 30, 2015 Share Posted April 30, 2015 Thanks TwoCitiesCapital ! My situation is this... I have a stable job and I believe I should be able to exercise the warrants in 2019 and , hopefully, at that point they are paying out good dividends. So instead of buying a lot of commons now, I figure why not buy the warrants (now that it appears cheaper than when the stock was at $18 a year or so ago), and have the capitals set aside for other ideas. What I am not clear about is if 8% cost of leverage is 'cheap'. I think warrants were $8 or so ( ? ) last year.. but now they are $5.7... Am I mistaken to think that it is now cheaper than it was ? or is there something that I have not understood. Thanks Gary So I calculate the warrant's to be about 7.8% cost now - I have two questions... a) At what % do people feel the warrants are cheap ? ! b) If I buy them today, the cost is 7.8%... but if the commons go up to say $18, I believe the 'cost' of leverage decreases dramatically. What should I make of this? I mean when I paid the cost is 7.8%. But as the commons appreciate, does my cost go down ? Thanks ! Gary 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. Your cost doesn't go down because the cost is paid upfront - just like an option. You actually lose some value on this because as the cost of leverage goes down, it generally means that one of the component pieces of the warrant's price is going down as well. You own the warrant and one of the pieces of the warrant's value is falling. But I doubt you're buying the warrant to arbitrage the cost of leverage. Generally, the hope would be that the return from the rise in the stock would counteract for this and the leveraged returns would still exceed the returns from owning the underlying security. The cost of leverage calculation really only helps you compare buying the warrant to other alternative means of leverage and to know when leverage is cheap. Link to comment Share on other sites More sharing options...
redskin Posted April 30, 2015 Share Posted April 30, 2015 We might get a stock price around $18.00 in two years. That would be about 10% annualized return from today's price. Plus a have a free option on rising rates. Not too bad. To me it is not an environment to be too greedy. With the common - Its actually 8% per my post. I agree it is not an environment to be greedy. Options may not be the best way to do things any more. Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks. Hi Tyler, I do look at the warrants. I guess my real question is: Knowing what we know today: Is BAC a good investment compared to other choices today? What would you project the returns on the common and the warrants going forward 3.75 years? Hi there. Good questions. For me, I see more value at BAC vs at least other banks since it is still the unloved stock even among the banks so there could be more upside because of that and the rate increase potential too of course. If you compare it to broader space there will be more attractive investments for sure but no one can analyze all the spectrum anyways. I think 20 USD TBV is very fair game for 2018 and assuming stock will not trade below TBV going forward that could give downside protection for the warrants. Upside is more sizable w/ warrants therefore warrants is a better investment to me for the patient investor. Hard to project a specific return for 3.75 years in advance but I'd think the common will trade between 20 and 30 and warrants could give you really good upside potential if that happens. I think a big factor is the number of shares they are able to buy back. The recent CCAR was encouraging regarding the excess capital in excess of minimum requirements. During the Q1 presentation, management indicated that capital was $22 billion in excess of the minimum requirements. It seems they were only restricted to buy back more stock by the weak earnings in 2014 due to huge legal expense. With the cushion of the $22 billion, I think they will be returning all of their earnings over the next few years. Here are my estimates of the number of shares they will be able to retire. Just to be conservative, I'll use prices/share that many of you will think are too high. 2015 $4 billion avg. @ $18. 222mm shares 2016 $15 billion avg. @ $25 600mm shares 2017 $20 billion avg. @ $35 571mm shares 2018 $20 billion avg. @ $45 444mm shares Total shares bought 1,837mm. Share count falls from 11,200mm to 9,300mm. What will they be earning in 3.75 years? If assets increase 3% annually, total assets will be approximately $2.4 trillion. I don't think its a very high benchmark for them to earn 1% on assets. I would expect them to do a bit better. 1% ROA on $2.4 trillion would be $24B 1.25% brings it up to $30B On 9.3 billion shares, earnings per share would be somewhere between $2.58-3.22/share. Multiple? I think the multiples on bank earnings should be higher than they have been historically since they are so much safer with the increased capital requirements. I would put a 14-15 multiple on those earnings. Link to comment Share on other sites More sharing options...
vinod1 Posted April 30, 2015 Share Posted April 30, 2015 I think a big factor is the number of shares they are able to buy back. The recent CCAR was encouraging regarding the excess capital in excess of minimum requirements. During the Q1 presentation, management indicated that capital was $22 billion in excess of the minimum requirements. It seems they were only restricted to buy back more stock by the weak earnings in 2014 due to huge legal expense. With the cushion of the $22 billion, I think they will be returning all of their earnings over the next few years. Here are my estimates of the number of shares they will be able to retire. Just to be conservative, I'll use prices/share that many of you will think are too high. 2015 $4 billion avg. @ $18. 222mm shares 2016 $15 billion avg. @ $25 600mm shares 2017 $20 billion avg. @ $35 571mm shares 2018 $20 billion avg. @ $45 444mm shares Total shares bought 1,837mm. Share count falls from 11,200mm to 9,300mm. What will they be earning in 3.75 years? If assets increase 3% annually, total assets will be approximately $2.4 trillion. I don't think its a very high benchmark for them to earn 1% on assets. I would expect them to do a bit better. 1% ROA on $2.4 trillion would be $24B 1.25% brings it up to $30B On 9.3 billion shares, earnings per share would be somewhere between $2.58-3.22/share. Multiple? I think the multiples on bank earnings should be higher than they have been historically since they are so much safer with the increased capital requirements. I would put a 14-15 multiple on those earnings. Dividends would take a chunk of the earnings so buybacks would be less. I would expect at least $15 billion in dividends over the 2016-2018 period. Then if assets grow by nearly 10%, then equity would likewise need to go up by 10% to support it, so that would take another chunk of from buybacks. So, I think buybacks are going to be much lower than your estimates. But I would be rooting for your estimates to come true :) Vinod Link to comment Share on other sites More sharing options...
wescobrk Posted April 30, 2015 Share Posted April 30, 2015 redskin, the fed said it wasn't because of legal expenses but because they can't measure their risk. Remember, it wasn't just $4billion it was a conditional pass meaning the fed gave them some slack. Link to comment Share on other sites More sharing options...
redskin Posted April 30, 2015 Share Posted April 30, 2015 redskin, the fed said it wasn't because of legal expenses but because they can't measure their risk. Remember, it wasn't just $4billion it was a conditional pass meaning the fed gave them some slack. Where did you see that statement from the Fed? Link to comment Share on other sites More sharing options...
tylerdurden Posted April 30, 2015 Share Posted April 30, 2015 redskin, the fed said it wasn't because of legal expenses but because they can't measure their risk. Remember, it wasn't just $4billion it was a conditional pass meaning the fed gave them some slack. Where did you see that statement from the Fed? Thanks for the analysis redskin! I think BAC got conditional approval because of the qualitative test, not quantitative and they received full capital returns they requested without any resubmissions. Fed found some shortcomings in BofA's risk management systems etc. so hopefully that will get fixed this year after a couple of f... ups already, spending $100M and keeping people more accountable. Legal expenses created two issues: 1) Obviously earnings were dismal in 2014 because of legal expenses therefore there were no excess capital to return 2) Their operational risks were elevated at CCAR so capital requirement was higher. #1 hopefully will not exist this year (knock on wood!) #2 will average out based on CFO's explanation. It is a matter of bid and ask though so they probably don't know how fast that will average out from the capital requirements at this point. I also think that they should be able to return most of their earnings going forward. Dilution from compensation would probably decrease redskin's numbers a little bit but gradual improvements in LAS and normalized litigation should help them to decrease their capital requirements further or they can allocate more capital to businesses such as global markets which should increase earnings. Either way it should be positive. Link to comment Share on other sites More sharing options...
FCharlie Posted May 1, 2015 Share Posted May 1, 2015 Looks like the buyback has begun. 17.4 million shares disappeared in April. As of February 24, 2015, there were 10,519,566,829 shares of Common Stock outstanding. On April 28, 2015, there were 10,502,100,218 shares of Bank of America Corporation Common Stock outstanding. Link to comment Share on other sites More sharing options...
RadMan24 Posted May 1, 2015 Share Posted May 1, 2015 @ Redskin. Now you see why Buffett wants his stocks to go down. If you know with a high degree of certainty, that a stock will earn $24-$30 billion in the future, you'd want them to buyback all the stock they can at a low price, for several years, and increase the value per share you get out of the investment. Link to comment Share on other sites More sharing options...
redskin Posted May 4, 2015 Share Posted May 4, 2015 @ Redskin. Now you see why Buffett wants his stocks to go down. If you know with a high degree of certainty, that a stock will earn $24-$30 billion in the future, you'd want them to buyback all the stock they can at a low price, for several years, and increase the value per share you get out of the investment. Yes. If the stock remains this cheap, the B warrants may become very valuable. Link to comment Share on other sites More sharing options...
Liberty Posted May 4, 2015 Share Posted May 4, 2015 Or they'll stay cheap all the way to the next financial crisis ;) Link to comment Share on other sites More sharing options...
redskin Posted May 4, 2015 Share Posted May 4, 2015 Always possible. I don't see a crisis coming from the banking industry any time soon considering the loan underwriting over the last 6 years and the huge builds in capital. Link to comment Share on other sites More sharing options...
vinod1 Posted May 5, 2015 Share Posted May 5, 2015 Today I switched from Warrants to LEAPS as warrants cost of leverage increased to 9.25%. To me it is bit on the expensive side. $15 strike LEAPS cost of leverage is around 7%. Combine with lower investment requirement and higher strike price, it has a better risk reward. Vinod Today I switched back to Warrants from LEAPS. In these two weeks my LEAP position was up 26.2% while warrants were up only 1.2%. Vinod Link to comment Share on other sites More sharing options...
redskin Posted May 6, 2015 Share Posted May 6, 2015 Annual meeting presentation.... http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-EventDetails&EventId=5192259#fbid=exF4Uxy-due Link to comment Share on other sites More sharing options...
vinod1 Posted May 6, 2015 Share Posted May 6, 2015 Annual meeting presentation.... http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-EventDetails&EventId=5192259#fbid=exF4Uxy-due Thanks! The target of 1% ROA, excludes $1 billion in annual retirement costs. Management certainly does not believe in stretch goals :) Vinod Link to comment Share on other sites More sharing options...
CorpRaider Posted May 6, 2015 Share Posted May 6, 2015 Great job with the zero percent growth in global wealth and investment management during the roaring bull market. You are really killing it with Merrill guys, save some leftovers for JPM, MS and GS. Link to comment Share on other sites More sharing options...
vinod1 Posted May 7, 2015 Share Posted May 7, 2015 Annual meeting presentation.... http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-EventDetails&EventId=5192259#fbid=exF4Uxy-due Thanks! The target of 1% ROA, excludes $1 billion in annual retirement costs. Management certainly does not believe in stretch goals :) Vinod After a question from a fellow board member, I now realize that the retirement costs are probably not excluded. They are only accounting for the fact that the costs should be spread out throughout the year. My mistake. Vinod Link to comment Share on other sites More sharing options...
redskin Posted May 14, 2015 Share Posted May 14, 2015 Well Fargo is valued at $115 billion more than Bank of America. Doesn't make any sense to me. I own and like WFC, but I think a great trade would be short WFC/Long BAC. Link to comment Share on other sites More sharing options...
gary17 Posted May 22, 2015 Share Posted May 22, 2015 Do people think BAC A warrants are now fairly cheap ? So I get a cost of leverage of about 5.27% - Link to comment Share on other sites More sharing options...
jeeman Posted May 23, 2015 Share Posted May 23, 2015 Do people think BAC A warrants are now fairly cheap ? So I get a cost of leverage of about 5.27% - I own the warrant around a cost of $5.90. They have only drifted downwards, probably because of the time decay in the last 3 months. Hopefully BAC hits 18, and these dogs drift upwards. Link to comment Share on other sites More sharing options...
sys Posted May 24, 2015 Share Posted May 24, 2015 Do people think BAC A warrants are now fairly cheap ? So I get a cost of leverage of about 5.27% - I own the warrant around a cost of $5.90. They have only drifted downwards, probably because of the time decay in the last 3 months. Hopefully BAC hits 18, and these dogs drift upwards. i don't think you should see that much time decay for a three month period this far out from expiration. they just bounce around some on sentiment. Link to comment Share on other sites More sharing options...
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