BAC-WT - Bank of America Warrants

[orthopa]

I hold A warrants too, luckily from at a fairly lower cost basis. Just a little under 3.5 years for rates to start rising and the bank "most exposed to rising rates" to start performing.

[benchmark]

I hold A warrants too, luckily from at a fairly lower cost basis. Just a little under 3.5 years for rates to start rising and the bank "most exposed to rising rates" to start performing.

 

I also think that BAC should move with rate hikes, but I've been wrong on how soon that will happen ;(

[CorpRaider]

I just entered another limit order.  I fear I may be suffering from Stockholm Syndrome. :o

[vinod1]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

[fareastwarriors]

Well JPM are cutting voicemails. Every penny counts.

 

JPMorgan cuts the cord on voicemail

http://www.cnbc.com/id/102727077?trknav=homestack:topnews:18

[redskin]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

 

I view this as somewhat positive.  I think there is a lot more opportunity for BAC to reduce costs.

[tylerdurden]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

 

Brian Moynihan thinks on an adjusted basis efficiency ratio is high 60s for the first quarter 2015. (adjustment is for the retirement costs I believe). Since they have the private wealth management business and the cost structure on that business line is higher they would be higher anyways versus the banks which do not have that business. (I don't think JPM has sizeable wealth management compared to Merrill business) So this is one factor. His target was low 60s and then below that for the efficiency ratio. I think they are well aware that they are behind in terms of the expenses and they are improving quarter after quarter. It just takes a lot of time. For now aim is to keep expenses flat to slightly lower (I think he is conservative again) and if business does not pick up they will go for another round of cost cuts etc. To me it is good strategy especially with the improving outlook out there.

[vinod1]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

 

I view this as somewhat positive.  I think there is a lot more opportunity for BAC to reduce costs.

 

I would think so too. But, Moynihan seems to be doing victory laps after completion of New BAC. Other than LAS expense reductions, if there are still opportunities, management is not talking about them, other than the generic "we are always looking to take down expenses"....

 

Do you think there is something like a "Newer BAC" in pipeline if there are opportunities?

 

Vinod

[vinod1]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

 

Brian Moynihan thinks on an adjusted basis efficiency ratio is high 60s for the first quarter 2015. (adjustment is for the retirement costs I believe). Since they have the private wealth management business and the cost structure on that business line is higher they would be higher anyways versus the banks which do not have that business. (I don't think JPM has sizeable wealth management compared to Merrill business) So this is one factor. His target was low 60s and then below that for the efficiency ratio. I think they are well aware that they are behind in terms of the expenses and they are improving quarter after quarter. It just takes a lot of time. For now aim is to keep expenses flat to slightly lower (I think he is conservative again) and if business does not pick up they will go for another round of cost cuts etc. To me it is good strategy especially with the improving outlook out there.

 

Good points.

 

I was thinking about wealth management too and that might be part of the reason. However, to a first approximation, if we just use non-interest revenues as a proxy for non-interest expenses, both BAC and JPM have roughly the same percentage coming from non-interest revenues compared to total revenues. Also JPM has a pretty big AM business which likewise has higher non-interest expense base.

 

In 2014, Q1 call, Bruce Thompson said that the efficiency goal is "look out in a couple of years, that efficiency ratio should be in the high 50s". I am not seeing a path to this even a "couple of years" from now.

 

Vinod

[CorpRaider]

Weird. I was just looking at this last night, in a high level sense based just on M* and Valueline summary data.  That's what my initial hypothesis was; that the Merrill asset gathering business might be part of the reason, but they keep highlighting the higher ROI on capital allocated there.  Haven't yet dug around to see if I can get a better handle on it.  Didn't BM just say they would have to take some more costs from the bond trading area in a couple of years if I-rates/bonds didn't start getting some movement?  Maybe they have a big coiled spring waiting for some taper tantrums. 

 

I think some fairly large sums have been paid to Merrill masters of the universe, including in some third-tier markets.  I don't know that JPM has had to shell out several million in retention payments to the big swinging you know what in Topeka, KS to keep him from taking his book to Morgan or UBS.

[tylerdurden]

Bank of America had $62.6 billion in operating expenses in 2011 excluding LAS and litigation expenses. These have been brought down to $53.3 billion in 2014, which indicates New BAC effort has paid off. New BAC cost savings have been completed in 2014 so there are no additional cost reductions from this.

 

But efficiency ratio is still about 70%. Even if LAS expenses come down to target level of $2 billion and litigation expenses are only $1 billion, with core expenses of $54 billion including retirement related, total expenses would be $57 billion and at a revenue level of $86 billion (2014 revenues excluding market related impact), efficiency ratio would only be 66%. They have a long way to catch up with JP Morgan and Wells Fargo in this regard.

 

I would think with easy pickings gone on expense savings, they would need to rely on revenue growth a.k.a. interest rate increases to bring down the efficiency ratio to a more acceptable level.

 

Any thoughts on why they are so much more inefficient compared to say JPM?

 

Vinod

 

Brian Moynihan thinks on an adjusted basis efficiency ratio is high 60s for the first quarter 2015. (adjustment is for the retirement costs I believe). Since they have the private wealth management business and the cost structure on that business line is higher they would be higher anyways versus the banks which do not have that business. (I don't think JPM has sizeable wealth management compared to Merrill business) So this is one factor. His target was low 60s and then below that for the efficiency ratio. I think they are well aware that they are behind in terms of the expenses and they are improving quarter after quarter. It just takes a lot of time. For now aim is to keep expenses flat to slightly lower (I think he is conservative again) and if business does not pick up they will go for another round of cost cuts etc. To me it is good strategy especially with the improving outlook out there.

 

Good points.

 

I was thinking about wealth management too and that might be part of the reason. However, to a first approximation, if we just use non-interest revenues as a proxy for non-interest expenses, both BAC and JPM have roughly the same percentage coming from non-interest revenues compared to total revenues. Also JPM has a pretty big AM business which likewise has higher non-interest expense base.

 

In 2014, Q1 call, Bruce Thompson said that the efficiency goal is "look out in a couple of years, that efficiency ratio should be in the high 50s". I am not seeing a path to this even a "couple of years" from now.

 

Vinod

 

Perhaps BM was referring to some other peers when he was making that comparison regarding BAC having wealth management business with lower margins. In anyways though there is significant pressure from the investors on this point. BM received back to back questions on this in one of the recent investor meetings. He also mentioned that they had to sell some of their investments in order to generate capital different than their peers when answering this same expense question. I guess that lowered their revenues so they have higher efficiency ratio.

 

Hard to see what improvement they can deliver on this in a couple of years but it seems they expect either their revenues is going to be higher or they will go through additional more aggressive cost cutting in order see lower efficiency ratio. How low is anybody's guess at this point...

[vinod1]

In anyways though there is significant pressure from the investors on this point. BM received back to back questions on this in one of the recent investor meetings. He also mentioned that they had to sell some of their investments in order to generate capital different than their peers when answering this same expense question. I guess that lowered their revenues so they have higher efficiency ratio.

 

Could you please let me know which meeting it was and is there a transcript available for it? I want to see how he responded.

 

Thanks

 

Vinod

[tylerdurden]

In anyways though there is significant pressure from the investors on this point. BM received back to back questions on this in one of the recent investor meetings. He also mentioned that they had to sell some of their investments in order to generate capital different than their peers when answering this same expense question. I guess that lowered their revenues so they have higher efficiency ratio.

 

Could you please let me know which meeting it was and is there a transcript available for it? I want to see how he responded.

 

Thanks

 

That was the Bernstein Strategic Decisions Conference on Wednesday, May 27. They had a replay on BAC's website but I do not see the replay anymore. You can search for the transcript online. You can find it somewhere perhaps...

 

Vinod

[vinod1]

In anyways though there is significant pressure from the investors on this point. BM received back to back questions on this in one of the recent investor meetings. He also mentioned that they had to sell some of their investments in order to generate capital different than their peers when answering this same expense question. I guess that lowered their revenues so they have higher efficiency ratio.

 

Could you please let me know which meeting it was and is there a transcript available for it? I want to see how he responded.

 

Thanks

 

That was the Bernstein Strategic Decisions Conference on Wednesday, May 27. They had a replay on BAC's website but I do not see the replay anymore. You can search for the transcript online. You can find it somewhere perhaps...

 

Vinod

 

Thanks. Found it

 

http://investor.bankofamerica.com/phoenix.zhtml?p=irol-eventDetails&c=71595&eventID=5194518#fbid=FnOPA3xV5X7

 

Vinod

[fareastwarriors]

Bank of America May Dodge a Legal Bullet

 

A legal victory for Deutsche Bank may help lighten mortgage claims against Bank of America

 

 

http://www.wsj.com/articles/bank-of-america-may-dodge-a-legal-bullet-1434127063

[Uccmal]

I am becoming more and more ambivalent about BAC. 

 

It doesn't like short term interest rates are going to rise anytime soon.  If the US raises even one quarter of a percent there is going to be a flood into US treasuries again, and the US Dollar will spike.  I just cant see the fed rushing this.  It is starting to look like it will take years from here.

[Happy]

Could Buffett buy more BAC if he wanted to or is he restricted by some legal limit? That he can buy a bigger stake in WFC both in absolute terms and in relation to the market cap suggests to me that he is not restricted, but just likes WFC better.

[gfp]

Berkshire could buy a lot more BAC if he wanted to, he is at 6% or below, fully diluted, I believe.  He is approaching 9.5% of Wells and will keep any bank position below 10% for Bank holding company rules.  I believe there is no issue if company share repurchases further increase his position above 10% in a bank holding company as long as he hasn't traded in the shares.  American Express is an example of this.

 

He has said many times that Wells is his favorite.  I would guess that USB is his second favorite, then JPM, which he owns 1 million shares of personally.  I think BAC was his favorite *at that price* - the warrants he got for 700m shares are at an absurdly low price.  And a 6% dividend while he waits is a nice deal.

 

Could Buffett buy more BAC if he wanted to or is he restricted by some legal limit? That he can buy a bigger stake in WFC both in absolute terms and in relation to the market cap suggests to me that he is not restricted, but just likes WFC better.

[CorpRaider]

To me, the 1MM shares JPM, for Buffett is a little token of esteem, hat-tip to his fellow Democrat business titan, Dimon.

[redskin]

Berkshire could buy a lot more BAC if he wanted to, he is at 6% or below, fully diluted, I believe.  He is approaching 9.5% of Wells and will keep any bank position below 10% for Bank holding company rules.  I believe there is no issue if company share repurchases further increase his position above 10% in a bank holding company as long as he hasn't traded in the shares.  American Express is an example of this.

 

He has said many times that Wells is his favorite.  I would guess that USB is his second favorite, then JPM, which he owns 1 million shares of personally.  I think BAC was his favorite *at that price* - the warrants he got for 700m shares are at an absurdly low price.  And a 6% dividend while he waits is a nice deal.

 

Could Buffett buy more BAC if he wanted to or is he restricted by some legal limit? That he can buy a bigger stake in WFC both in absolute terms and in relation to the market cap suggests to me that he is not restricted, but just likes WFC better.

 

While he is only at 6.25% currently, there is an outside possibility that BAC reduces their share count over the next 6+ years to a level where he would be approaching the 10% level.  For example, if he were to purchase $3 billion shares at current prices he would own an additional 170mm shares for a total of 870mm.  If BAC were to repurchase $15B shares annually over the next 5 years at an average price of $30 they would reduce the share count from 11.2b to 8.7b and Berkshire would be at 10%.  He wouldn't be able to exercise all of his warrants if it put him above the 10% threshold in 2021.

[CorpRaider]

I'm sure most read this already, but for the unwashed masses who missed it:

 

http://www.wsj.com/articles/fed-faulted-bofa-regarding-its-foresight-1434496115

 

So the board went ahead and gave BM the chairman slot despite:  1) most recent shareholder vote on the matter splitting the roles; 2) objections from proxy firms, noting said shareholder vote and recommending the reversing of this decision be left to the shareholders; 3) objection/expression of reservations by Federal Reserve noting same?

 

Also, glad to see they hired a specialist in the risk analysis expected as part of the Fed stress test as chief risk officer.  He was head of the group that was most responsible for huge capital miscalculation prior to said appointment?  Makes sense.  Well at least they threw $100MM plus at professional services firms to tell them how to do it; "all resources" indeed.

 

[ap1234]

There was a discussion a while back comparing BAC to WFC and whether there are structural reasons why BofA can't earn an adequate ROA. Bernstein published a note recently and isolated BAC's expense ratio versus other large US banks. The conclusion is that the majority of BAC's higher expense ratio is a function of business mix:

 

"BAC is lagging on efficiency… BAC is generally perceived to be a laggard on expenses, and on a headline basis, this perception plays out in our adjusted numbers, with the company's efficiency ratio at ~66% even embedding the benefit from all of the progress it expects on LAS costs over the next two years. BAC also comes in worse than universal peers on expense/assets, while its revenue/assets is basically in-line despite a higher concentration of loans on its balance sheet.

 

…but perhaps not as much as you think. We think there are a few factors that explain much of BAC's higher efficiency ratio compared to peers – the company's business mix is weighted much more heavily to wealth management which screens poorly on efficiency, and it seems plausible that BAC's revenue yields are even more cyclically depressed than peers given its higher rate sensitivity, though this also could partially reflect the competitive positioning of the underlying businesses relative to peers.

 

Adjusting for business mix, we size up BAC against JPM and find that ~60% of the difference in efficiency in 1Q15 could be explained by business mix – i.e. if it had JPM's revenue mix, we estimate BAC would have had an adjusted efficiency more like ~62% in 1Q15, compared to ~66% on our adjusted numbers and ~59% for JPM. Going forward we think BAC could have some incremental expense leverage outside of LAS and legal, though this is likely to remain a "show me" story until the company

demonstrates it has room to improve on core expenses net of investments in its business, in our view."

[vinod1]

There was a discussion a while back comparing BAC to WFC and whether there are structural reasons why BofA can't earn an adequate ROA. Bernstein published a note recently and isolated BAC's expense ratio versus other large US banks. The conclusion is that the majority of BAC's higher expense ratio is a function of business mix:

 

"BAC is lagging on efficiency… BAC is generally perceived to be a laggard on expenses, and on a headline basis, this perception plays out in our adjusted numbers, with the company's efficiency ratio at ~66% even embedding the benefit from all of the progress it expects on LAS costs over the next two years. BAC also comes in worse than universal peers on expense/assets, while its revenue/assets is basically in-line despite a higher concentration of loans on its balance sheet.

 

…but perhaps not as much as you think. We think there are a few factors that explain much of BAC's higher efficiency ratio compared to peers – the company's business mix is weighted much more heavily to wealth management which screens poorly on efficiency, and it seems plausible that BAC's revenue yields are even more cyclically depressed than peers given its higher rate sensitivity, though this also could partially reflect the competitive positioning of the underlying businesses relative to peers.

 

Adjusting for business mix, we size up BAC against JPM and find that ~60% of the difference in efficiency in 1Q15 could be explained by business mix – i.e. if it had JPM's revenue mix, we estimate BAC would have had an adjusted efficiency more like ~62% in 1Q15, compared to ~66% on our adjusted numbers and ~59% for JPM. Going forward we think BAC could have some incremental expense leverage outside of LAS and legal, though this is likely to remain a "show me" story until the company

demonstrates it has room to improve on core expenses net of investments in its business, in our view."

 

Thank you!

 

As the author points out, BAC revenue being more depressed than the peers is one possible explanation. It is unlikely to be the wealth management business because it is doing very well. So what other segment could have unusually depressed revenues compared to peers? I cannot think of anything that stands out.

 

Vinod

[karthikpm]

http://online.barrons.com/articles/bank-of-americas-tarp-warrants-may-pay-off-for-patient-investors-1435376351

 

Playing BofA’s TARP Warrants

 

 

[OracleofCarolina]

http://online.barrons.com/articles/bank-of-americas-tarp-warrants-may-pay-off-for-patient-investors-1435376351

 

Playing BofA’s TARP Warrants

 

Pretty much useless article..This author should read Ericopoly's posts