BAC-WT - Bank of America Warrants

[jay21]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

[ourkid8]

The only one sounding inexperienced is yourself.  Lets take a walk down memory lane at another industry which is also highly regulated and see what a superstar CEO can do.  CP Rail was by far the worst run Class I railroad in N.A by every metric. HH was appointed CEO in June 2012 and turned it around to be one of the best run railroad in N.A in less then 3 years.  Remember, this is an industry where the pace of change happens extremely slow and the competitors had a significant head-start.  I do not want to get into the whole story as very few individuals imagined this turn around was even possible in such a short period of time however from day 1 he set goals and exceeded each and every one of them.  That is a superstar leader who had a plan, set a clear vision and executed/exceeded each one of them. (I can also give any of the turnarounds 3G has accomplished but I hope you understand my point)

 

I know exactly what you are going to say, the company you are comparing is much smaller, it's not a financial institution and bank of america was in an even worst situation then CP etc etc etc... however this is Year #6 for BM and BAC is still lags every US Mega Cap on almost every metric and it continues to show no sense of urgency to show meaningful improvement.  There is not 1 metric that demonstrates he has done a terrific job in managing BAC, dealing with regulators or shareholders.

 

At best, he barely gets a passing grade for his work.  Unless you can demonstrate based on a tangible metric he has done a terrific job.  Does anyone know any goal he has set/exceeded besides constantly reminding us when interest rates rise we will make x amount? 

 

Yes, I truly do and saying overnight is facetious.  If Jamie/John Stumph etc. caliber CEO was named to the post, they will come in with a 90 day plan to change the direction/culture of this organization. BAC is similar to AIG and that's why Carl Icahn is hammering away at the fact management has no credibility and has zero sense of urgency.  What is BAC's time frame to hit INDUSTRY metrics on a ROE/ROA/efficiency etc?  BM still has not been able to share that information, it's asinine how someone can support him and say he is doing a great job!  These guys are highly paid and must be held to account yet people accept mediocrity.  I really hope Carl Icahn can take a stake in BAC/C and force change...

 

 

You don't sound very experienced in how a very large institution, much less a very large financial institution, works.

 

Like all big banks, B of A's consumer banking segment is by far its most profitable - generating ROTCE of 25%, in line with the best of its peers such as Wells. Their least profitable, and incidentally highly capital draining business, is their global markets business. You think you can completely dismantle a bank's entire trading operation within the scope of a year, much less even be able to do that since you're such an integral market maker? There is no chance of that happening. So taken as a whole, B of A will be a less profitable business (especially if regulation on FICC trading remains or becomes even more difficult) than a bank like Wells.

 

Also, their legacy assets from Countrywide and the mess they got themselves into during the housing bubble is still in continual run-off and still looms large on their balance sheet. Considering all this, the fact that B of A has managed to turn in a ROTCE of 10% (excl. litigation costs) in 2015 is impressive.

 

Given the hand that he was dealt, Moynihan has done a terrific job.

[Viking]

If anyone wants an example of what strong leadership can accomplish go to the JPM investor relations web site and listen to their investor day presentation from last Feb. It clearly maps out what the plan is at JPM in pretty good detail. You can also read the CEO comments in the last couple of Annual Reports. You can also listen to each of the 4 earnings conference calls each year. JPM has lots of flaws; I understand the flaws better because of all the disclosure they provide.

 

In another 4 weeks JPM will be having another investor day. Most importantly investors are able to assess how well JPM is executing. Not everything goes exactly as planned. However, given the puts and takes, with all the information given investors can make a more informed decision.

 

My issue with BAC is they do not have a well articulated plan. Why not? As a result, as an investor, I do not have the same level of confidence in the CEO or in the company.

[Rasputin]

My issue with BAC is they do not have a well articulated plan. Why not? As a result, as an investor, I do not have the same level of confidence in the CEO or in the company.

 

BAC's management has stated many times what their plan is.  It's in their annual report, quarterly conference calls.  If you just spend the same amount time you spend with JPM, you will definitely know BAC's plan. 

 

 

[Rasputin]

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs. If you look at some of the threads, you would see how even negative information would be seen in a positive light - by some very very good investors. It is easy to see in others, not so much in one's own.

 

Vinod

 

I would love to see the bear thesis backed with numbers, instead of "wise" sounding opinions about how crappy BAC is, how bad Moynihan is, and how bad BAC's condition is.  I see very few people commenting on this board that actually know what's going on with BAC other than the movement of its stock price.

[wescobrk]

My two cents is regardless of how good--or not good--the CEO is, if you buy at a great price, the results will, at some point, take care of itself.

At the end of the day, all that matters is if you made money from the stock or not.

[vinod1]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

[vinod1]

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs. If you look at some of the threads, you would see how even negative information would be seen in a positive light - by some very very good investors. It is easy to see in others, not so much in one's own.

 

Vinod

 

No bear thesis. We are arguing is BAC worth a lot more than the current price or a really lot more. :)

 

Vinod

 

I would love to see the bear thesis backed with numbers, instead of "wise" sounding opinions about how crappy BAC is, how bad Moynihan is, and how bad BAC's condition is.  I see very few people commenting on this board that actually know what's going on with BAC other than the movement of its stock price.

[jay21]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

 

I am not talking about their consumer banking or other business units. I am talking about the disclosed LAS business unit, which is mainly NPLs and MSRs. Just think about how much capital they have to hold for an NPL that does not generate income. Once that NPL is gone, they should be able to take that "trapped" capital and allocate it elsewhere.

 

These guys have one of the safest B/S with some of the most legacy issues. I'd expect the B/S to be risked up over the next years.

[Peregrine]

The only one sounding inexperienced is yourself.  Lets take a walk down memory lane at another industry which is also highly regulated and see what a superstar CEO can do.  CP Rail was by far the worst run Class I railroad in N.A by every metric. HH was appointed CEO in June 2012 and turned it around to be one of the best run railroad in N.A in less then 3 years.  Remember, this is an industry where the pace of change happens extremely slow and the competitors had a significant head-start.  I do not want to get into the whole story as very few individuals imagined this turn around was even possible in such a short period of time however from day 1 he set goals and exceeded each and every one of them.  That is a superstar leader who had a plan, set a clear vision and executed/exceeded each one of them. (I can also give any of the turnarounds 3G has accomplished but I hope you understand my point)

 

I know exactly what you are going to say, the company you are comparing is much smaller, it's not a financial institution and bank of america was in an even worst situation then CP etc etc etc... however this is Year #6 for BM and BAC is still lags every US Mega Cap on almost every metric and it continues to show no sense of urgency to show meaningful improvement.  There is not 1 metric that demonstrates he has done a terrific job in managing BAC, dealing with regulators or shareholders.

 

At best, he barely gets a passing grade for his work.  Unless you can demonstrate based on a tangible metric he has done a terrific job.  Does anyone know any goal he has set/exceeded besides constantly reminding us when interest rates rise we will make x amount? 

 

Yes, I truly do and saying overnight is facetious.  If Jamie/John Stumph etc. caliber CEO was named to the post, they will come in with a 90 day plan to change the direction/culture of this organization. BAC is similar to AIG and that's why Carl Icahn is hammering away at the fact management has no credibility and has zero sense of urgency.  What is BAC's time frame to hit INDUSTRY metrics on a ROE/ROA/efficiency etc?  BM still has not been able to share that information, it's asinine how someone can support him and say he is doing a great job!  These guys are highly paid and must be held to account yet people accept mediocrity.  I really hope Carl Icahn can take a stake in BAC/C and force change...

 

 

You don't sound very experienced in how a very large institution, much less a very large financial institution, works.

 

Like all big banks, B of A's consumer banking segment is by far its most profitable - generating ROTCE of 25%, in line with the best of its peers such as Wells. Their least profitable, and incidentally highly capital draining business, is their global markets business. You think you can completely dismantle a bank's entire trading operation within the scope of a year, much less even be able to do that since you're such an integral market maker? There is no chance of that happening. So taken as a whole, B of A will be a less profitable business (especially if regulation on FICC trading remains or becomes even more difficult) than a bank like Wells.

 

Also, their legacy assets from Countrywide and the mess they got themselves into during the housing bubble is still in continual run-off and still looms large on their balance sheet. Considering all this, the fact that B of A has managed to turn in a ROTCE of 10% (excl. litigation costs) in 2015 is impressive.

 

Given the hand that he was dealt, Moynihan has done a terrific job.

 

This is comparing apples to oranges. Your belief in "superstar CEOs" includes no context to the various different industries in which they operate in.

 

And you failed to answer my question: how can they completely disband their trading operation and rid their balance sheet of LAS assets over the course of a year? JPM, a bank that you speak of so highly, earns crap ROEs on their market-making business as well - is that an indictment on the quality of Dimon as a leader? Understand the circumstances involved.

 

I don't want to get in much detail here, but your understanding of just how well Hunter Harrison has done at CP may also be misplaced. There is no doubt that he has boosted the efficiency of the rail network and improved the railroad's metrics in the short-term, thereby boosting its stock price. There is doubt, however, that all of his policies are going to benefit shareholders in the long-run.

[ERICOPOLY]

I don't really care who the CEO is as much as you. 

 

I'd rather them get rid of the ATMs and bring in the hot latte girls to dole out the cash -- tell you how rich you are and be all flirty.

 

Now that would drive deposits!

[vinod1]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

 

I am not talking about their consumer banking or other business units. I am talking about the disclosed LAS business unit, which is mainly NPLs and MSRs. Just think about how much capital they have to hold for an NPL that does not generate income. Once that NPL is gone, they should be able to take that "trapped" capital and allocate it elsewhere.

 

These guys have one of the safest B/S with some of the most legacy issues. I'd expect the B/S to be risked up over the next years.

 

LAS is a bit of a misnomer. It is just not legacy stuff. It used to be that prior to Jan 1, 2012 reorg.

 

Previously LAS used to service only legacy part of the servicing portfolio. Now it includes all mortgage servicing so it would have some NPL's and MSRs always.

 

So the capital that would be freed up is not as much as you estimated. They do not disclose the level of detail to estimate it but given the reductions already in delinquent first mortgage loans I would think it is a smallish number.

 

Vinod

[Rasputin]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

 

I am not talking about their consumer banking or other business units. I am talking about the disclosed LAS business unit, which is mainly NPLs and MSRs. Just think about how much capital they have to hold for an NPL that does not generate income. Once that NPL is gone, they should be able to take that "trapped" capital and allocate it elsewhere.

 

These guys have one of the safest B/S with some of the most legacy issues. I'd expect the B/S to be risked up over the next years.

 

LAS is a bit of a misnomer. It is just not legacy stuff. It used to be that prior to Jan 1, 2012 reorg.

 

Previously LAS used to service only legacy part of the servicing portfolio. Now it includes all mortgage servicing so it would have some NPL's and MSRs always.

 

So the capital that would be freed up is not as much as you estimated. They do not disclose the level of detail to estimate it but given the reductions already in delinquent first mortgage loans I would think it is a smallish number.

 

Vinod

 

Majority of the allocated capital within LAS is due to operational risk.  Within BAC RWA, 500 B is operational risk ($100 B higher than JPM).  Most of this is due to correspondent lending which BAC stopped doing in 2011.  Basel 3 committee is coming up with rule on how to calculate operational risk going forward so we probably won't see much reduction of capital in LAS until this rule is set in stone.

 

From JPM conference call, the CFO said what you did 2 years ago stay with you until 3 years from now.  If that time frame is correct, the fed may allow reduction in BAC operational risk starting with 2017 CCAR. 

 

The numbers for LAS:

 

Average total loans and leases 2014 : $36 B

Average total loans and leases 2015 : $24 B

 

Allocated capital 2014 : $17 B

Allocated capital 2015 : $24 B

 

The increase in allocated capital is due to operational risk the regulator require.  Overtime this should go down. 

 

 

[vinod1]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

 

I am not talking about their consumer banking or other business units. I am talking about the disclosed LAS business unit, which is mainly NPLs and MSRs. Just think about how much capital they have to hold for an NPL that does not generate income. Once that NPL is gone, they should be able to take that "trapped" capital and allocate it elsewhere.

 

These guys have one of the safest B/S with some of the most legacy issues. I'd expect the B/S to be risked up over the next years.

 

LAS is a bit of a misnomer. It is just not legacy stuff. It used to be that prior to Jan 1, 2012 reorg.

 

Previously LAS used to service only legacy part of the servicing portfolio. Now it includes all mortgage servicing so it would have some NPL's and MSRs always.

 

So the capital that would be freed up is not as much as you estimated. They do not disclose the level of detail to estimate it but given the reductions already in delinquent first mortgage loans I would think it is a smallish number.

 

Vinod

 

Majority of the allocated capital within LAS is due to operational risk.  Within BAC RWA, 500 B is operational risk ($100 B higher than JPM).  Most of this is due to correspondent lending which BAC stopped doing in 2011.  Basel 3 committee is coming up with rule on how to calculate operational risk going forward so we probably won't see much reduction of capital in LAS until this rule is set in stone.

 

From JPM conference call, the CFO said what you did 2 years ago stay with you until 3 years from now.  If that time frame is correct, the fed may allow reduction in BAC operational risk starting with 2017 CCAR. 

 

The numbers for LAS:

 

Average total loans and leases 2014 : $36 B

Average total loans and leases 2015 : $24 B

 

Allocated capital 2014 : $17 B

Allocated capital 2015 : $24 B

 

The increase in allocated capital is due to operational risk the regulator require.  Overtime this should go down.

 

Good point on the operational risk. I remember reading in one of the big bank transcripts about a 5 year lag so that makes sense.

 

I am not sure how much actual capital would be released though as operational risk is a bit fuzzy from the outside - we would need to look not just at the loans being held but also the servicing portfolio and a bunch of other factors.

 

Thanks

 

Vinod

[Rasputin]

tough 2016 severely adverse scenario.

 

Comparison to 2015 DFAST:

 

This year’s severely adverse scenario features a more severe downturn in the U.S. economy as compared to last year’s scenario. This increase in severity reflects

the Federal Reserve’s scenario design framework for stress testing, which includes countercyclical elements.  Under this framework, the unemployment rate in the severely adverse scenario will reach a peak of at least 10 percent, which leads to a progressively greater increase in the unemployment rate if the starting unemployment rate is below 6 percent. In line with the more severe U.S. recession, this year’s severely adverse scenario also features a path of negative short-term U.S. Treasury rates. Furthermore, this year’s scenario does not feature the pronounced increase in inflation that was featured in last year’s scenario.

 

Compared with the 2015 severely adverse scenario, weaker economic conditions in the 2016 severely adverse scenario may be expected to result in higher credit losses on a wide range of loans and securities.  Lower interest rates on Treasury securities suggest larger gains on the existing portfolio of these securities.

Negative short-term interest rates may be expected to reduce banks’ net interest margins and ultimately, to lower PPNR. However, in addition to these scenario changes, the Federal Reserve’s supervisory stress test projections will also reflect changes in the structure, business focus, and recent performance of the BHCs participating in the exercise.

 

GLOBAL MARKET SHOCK

 

The major differences between the 2016 and 2015 severely adverse scenarios include (1) a larger widening in credit spreads for municipal, sovereign, and

advanced economies’ corporate products; (2) generally, greater declines in the value of private equity investments, recently issued securitized products, and

non-agency residential MBS; (3) a more severe widening in basis spreads between closely related assets such as agency MBS and TBA forwards as well as

corporate bonds and credit default swaps; and (4) a general decline in U.S. Treasury rates, resulting in negative short-term rates, while short-term government

rates in Europe rise to positive or slightly negative levels, and Asian government rates across the term structure flatten or invert. These differences are intended to reflect the result of a more significant drop in liquidity than was assumed in the 2015  severely adverse scenario and would be expected to result in notably higher losses on more illiquid assets

 

[gary17]

darn...

[Rasputin]

vinod - how much of BofAs underperformance is due to holding on to too much capital and poor asset mix because of litigation and non-core?

 

I don't think Citi is meaningfully outperforming BofA and they are probably the only true comparable in terms of legacy issues.

 

Jay,

 

What I am saying is that after adjusting for all that, if you look at the operational performance there is a gap with peers. I do not know why, and speculated earlier in the thread as to some reasons.

 

I recently made it a large position, so if I am sounding negative, it is because I prefer to be the one arguing the bear side on my long positions.

 

I personally find confirmation bias to be perhaps the greatest source of errors and most the most difficult to eliminate, however hard I try. So to keep myself honest, I try to find a few negatives on my longs.

 

Vinod

 

I see people remove LAS expenses but in my mind that frees up capital to be released or reinvested into much higher rates of return. I am not sure of the opportunity so wanted to see if someone sized it up.

 

EDIT: In the 10Q, I see ~49b in assets and ~24b in allocated capital that is producing a loss. That's very inefficient capital. If that capital earned 10% its a 2b opportunity and at 20% its 4b. It may add up a little.

 

As things like this and the settlements pass, I think they will get a little more leeway to risk up the balance sheet and start managing for returns.

 

I do not think you can really do that. Mortgages are a core banking product and BAC cannot just jettison the unit and deploy the capital elsewhere like Berkshire can with an operating subsidiary.

 

They have estimated the core expenses at $2 billion so there is a big platform in place to support the product at scale. The problem is they are not generating the volume required  due to all the reasons I am alluding to above.

 

Vinod

 

I am not talking about their consumer banking or other business units. I am talking about the disclosed LAS business unit, which is mainly NPLs and MSRs. Just think about how much capital they have to hold for an NPL that does not generate income. Once that NPL is gone, they should be able to take that "trapped" capital and allocate it elsewhere.

 

These guys have one of the safest B/S with some of the most legacy issues. I'd expect the B/S to be risked up over the next years.

 

LAS is a bit of a misnomer. It is just not legacy stuff. It used to be that prior to Jan 1, 2012 reorg.

 

Previously LAS used to service only legacy part of the servicing portfolio. Now it includes all mortgage servicing so it would have some NPL's and MSRs always.

 

So the capital that would be freed up is not as much as you estimated. They do not disclose the level of detail to estimate it but given the reductions already in delinquent first mortgage loans I would think it is a smallish number.

 

Vinod

 

Majority of the allocated capital within LAS is due to operational risk.  Within BAC RWA, 500 B is operational risk ($100 B higher than JPM).  Most of this is due to correspondent lending which BAC stopped doing in 2011.  Basel 3 committee is coming up with rule on how to calculate operational risk going forward so we probably won't see much reduction of capital in LAS until this rule is set in stone.

 

From JPM conference call, the CFO said what you did 2 years ago stay with you until 3 years from now.  If that time frame is correct, the fed may allow reduction in BAC operational risk starting with 2017 CCAR. 

 

The numbers for LAS:

 

Average total loans and leases 2014 : $36 B

Average total loans and leases 2015 : $24 B

 

Allocated capital 2014 : $17 B

Allocated capital 2015 : $24 B

 

The increase in allocated capital is due to operational risk the regulator require.  Overtime this should go down.

 

Good point on the operational risk. I remember reading in one of the big bank transcripts about a 5 year lag so that makes sense.

 

I am not sure how much actual capital would be released though as operational risk is a bit fuzzy from the outside - we would need to look not just at the loans being held but also the servicing portfolio and a bunch of other factors.

 

Thanks

 

Vinod

 

Info on LAS servicing portfolio

 

12/31/2014 Mortgage servicing portfolio $693 Billion (5.272 million units)

12/31/2015 Mortgage servicing portfolio $565 Billion (4.351 million units)

 

Q42014 60+ days delinquent first mortgage 189k units

Q42015 60+ days delinquent first mortgage 103k units

 

So that $7 billion additional capital between q4 2014 and q4 2015 is all due to operational risk since both loans and leases and ms portfolio have gone down.  Risky loans have also gone down.

 

Brian's goal is to get 60+ days to 60k units or 1.5%. 

[gary17]

Mike Mayo upgraded BofA from sell o Outperform !!!!! LOL

[Spekulatius]

Mike Mayo upgraded BofA from sell o Outperform !!!!! LOL

 

BAC stock has underperformed and the timing to switch into the bullish camp seems rather good - what is there to laugh about?

[RhubarbXIV]

Mike Mayo upgraded BofA from sell o Outperform !!!!! LOL

 

BAC stock has underperformed and the timing to switch into the bullish camp seems rather good - what is there to laugh about?

 

Mayo's really going out on a limb with a $17 year end TBV and a $16 PT.

[BRK7]

Fed says 2016 CCAR results expected by June 30, 2016.  Last year, we got results in March.  Any explanation?

 

http://www.federalreserve.gov/bankinforeg/ccar.htm

 

[LC]

Fed says 2016 CCAR results expected by June 30, 2016.  Last year, we got results in March.  Any explanation?

 

http://www.federalreserve.gov/bankinforeg/ccar.htm

ccar reports are due april not dec.

[sswan11]

Barron's:  Time to Buy Bank Stocks

 

Big U.S. banks are in better shape than they have been in years, and yet they trade at levels last seen in 2011. Why Citi, JPMorgan, BofA, and Wells Fargo could jump 20%.

 

By ANDREW BARY

January 30, 2016

 

Illo: Scott Pollack for Barron's

Everyone knows that stocks have had a miserable January, one of the worst ever, but what they don’t know is that it could be a good sign. Even after rallying on Friday, the Standard & Poor’s 500 index finished the month down 5.1%. That’s the seventh-worst start since 1950, based on data from the Stock Trader’s Almanac. It’s encouraging, though, that five of the six weaker Januarys were followed by gains in the rest of the year.

 

This year, with declines in oil and other commodities raising concerns about global economic growth, investors have gravitated toward defensive sectors, like telecom and utilities, which finished higher in January, while dumping financials, technology, and materials stocks.

 

For banks and tech, there are strong arguments for recovery (see “5 Battered Tech Stocks to Buy Now”).

 

Bank stocks got off to a particularly weak start, with the widely followed KBW Bank Index of 24 companies, known as the BKX, falling 13%, led by big losses for the largest banks. Citigroup (ticker: C) declined 18%, to $42.50, and Bank of America (BAC) was off 16%, to $14; Morgan Stanley (MS), which is technically a bank but more of an investment bank, fell 19%, to $26.

 

With the selloff, the banking sector looks like one of the best bargains in the market. “This is an exciting time,” says CLSA banking analyst Mike Mayo. “Bank balance sheets are as strong as they’ve been in decades, and stock prices resemble recession troughs. Earnings are more stable than they have been in decades, and capital ratios are at the highest levels in 80 years.” Credit Suisse analyst Susan Katzke calculates that nine big banks she covers have tangible equity capital ratios averaging 8% now, double the levels in 2007, prior to the recession.

 

At its nadir last week, the BKX index was at its lowest level since mid-2013, and valuations were back to levels last seen in 2011, when the stock market was rattled by fears about Greece’s financial crisis.

 

As the table shows, the 10 leading banks and investment banks now trade for eight to 12 times projected 2016 earnings—a steep discount to the market multiple of about 16—and many trade near or below tangible book value. Some sport yields of 3% or more, and all will probably get the regulatory go-ahead to lift dividends later this year.

 

 

Tangible book, a conservative measure of shareholder equity, excludes goodwill and other intangible assets, which usually stem from acquisitions. It’s often viewed as a measure of liquidation value and doesn’t give banks credit for franchise value and low-cost deposit bases.

 

There’s probably at least 20% upside in all of these banks, which would still leave some below where they started the year.

 

“We’re constructive,” says Jason Goldberg, a banking analyst at Barclays. “The concerns we have are more than reflected in current valuations.” He says eight of the 22 banks in his coverage traded below tangible book value last week. The last three times that happened—in summer 1990, early 2009, and August 2011—turned out to be excellent buying opportunities.

 

WHAT ARE THE KEY ISSUES now? Wall Street is worried about the industry’s loans to the increasingly distressed U.S. energy sector. But based on information provided on banks’ energy exposure in fourth-quarter earnings releases and presentations on conference calls, that exposure looks manageable. Oil-and-gas companies generally account for no more than 1% to 3% of total loans, and banks already have set aside reserves against potential losses.

 

On the Wells Fargo (WFC) call, for instance, executives said they believe the bank to be adequately reserved for its $17 billion of disclosed energy exposure. CEO John Stumpf said the situation for banks now is better than it was in the 1980s, when energy prices collapsed. One reason is that much of the debt on the books of energy borrowers is subordinate to bank debt, giving banks more cushion.

 

JPMorgan Chase (JPM) CEO Jamie Dimon said on the bank’s conference call, “These are asset-backed loans, so a bankruptcy doesn’t necessarily mean the loan is bad.” Disclosure varies among banks about the extent of their energy exposure and the credit quality of borrowers.

 

For Citigroup and JPMorgan, the bulk of the exposure is to investment-grade borrowers, mitigating risk. Wells Fargo disclosed the $17 billion exposure to nonrated or junk-grade borrowers, but didn’t detail its lending to investment-grade borrowers, viewing it as safe.

 

Sanford C. Bernstein analyst John McDonald calculated that if cumulative losses on energy loans run at 7% to 14%, in line with the experience in the 1980s, the hit to earnings at major banks in 2016 and 2017 would be modest, at 2% to 5%. Says Mayo: “Banks have enough capital today to charge off every dollar of energy loans and still have more capital than they did at the last downturn.”

 

The bigger issue is whether U.S. energy problems portend broader credit problems. On that score, bank executives are upbeat, emphasizing the benefit to consumers from lower energy prices and a healthy housing market. Energy lending is a fraction of the size of mortgage lending in 2008. “The U.S. economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the past two years, it has created five million jobs,” Dimon said. “Corporate credit is quite good. Small-business formation: It’s not back to where it was, but it’s quite good.”

 

THE POLITICAL BACKDROP doesn’t help the banks. The top two Democratic presidential candidates bash the banks at every turn, calling them irresponsible and even criminal actors who caused the 2008 financial crisis. Sen. Bernie Sanders advocates a breakup of big banks, labeling them as too big and powerful and dangerous. The Republican candidates haven’t been much better with their rhetoric. Mayo argues that a mandated government breakup might help the stocks, since many trade below sum-of-the-parts valuations.

 

Locked inside Bank of America, for example, is the desirable Merrill Lynch brokerage franchise, and Morgan Stanley isn’t getting much credit for its lucrative brokerage unit. JPMorgan and Goldman Sachs Group (GS) have valuable asset-management businesses that aren’t getting much investor recognition.

 

There are other negatives besides energy loans. Net interest margins are under pressure, and revenue growth has been sluggish for several years. Earnings growth this year could be subdued, especially if the Fed does not increase interest rates, as expected. “This is the opposite of the situation before the financial crisis. Banks then had strong earnings and weak capital. Now they have strong balance sheets but softer earnings,” Mayo says.

 

The case can be made for all 10 of the banks. JPMorgan, the subject of a favorable Barron’s cover story last spring, has held up better than its peers in the past year. It’s a favorite of Mayo, who calls it the “Lebron James” of banking because of its strong offensive and defensive qualities. “Under $60, JPMorgan is an outright buy,” he says, ticking off its 3% dividend yield and 5% total return of capital, including stock buybacks. He has a $75 price target. The shares, now $59, trade for 10 times estimated 2016 earnings.

 

Citigroup is the cheapest of the bunch, trading for under eight times projected 2016 earnings and less than 70% of tangible book. While its emerging market exposure is weighing on the stock, Citi doesn’t get much credit for the great strides it has made since the financial crisis.

 

IT’S RARE TO FIND both Goldman Sachs and Morgan Stanley trading below tangible book value. Current returns aren’t great, with Goldman Sachs earning an 11% return on equity and Morgan Stanley, 8%. Yet, at nine times projected earnings, both discount much weaker outlooks.

 

Wells Fargo, Warren Buffett’s favorite bank, is rarely a steal, but it looks appealing now at $50, or 11 times estimated 2016 earnings, and yielding 3%. Its returns are among the highest of its large peers, and it’s less exposed to rocky financial markets than rivals like Citigroup and JPMorgan with big trading operations.

 

U.S. Bancorp (USB), another holding of Buffett’s Berkshire Hathaway (BRK.A), probably is the best-managed large regional bank in the country, with some of the highest returns. It commands the highest price/tangible book ratio among its peers, thanks to a nearly 20% return on tangible equity. Half of its revenues come outside of typical lending, including such areas as payments processing. It has one of industry’s best CEOs in Richard Davis. At $40, the stock trades for 12 times projected 2016 earnings. Barron’s Roundtable member Scott Black recommends the stock in the current issue.

 

Citizens Financial Group (CFG) and Regions Financial (RF) are favored by Matthew Lindenbaum of Basswood Partners, a New York investment firm with a focus on financial stocks. Both traded last week at discounts to tangible book value and have ample capital. Citizens has a tangible equity/asset ratio of 10% and Regions, 9%. At $21, Citizens trades at 12 times projected 2016 earnings, and Regions, at $8, fetches 10 times estimated 2016 net. Regions has higher energy lending exposure than other regionals.

 

“Their businesses are doing fine,” Lindenbaum says. “They have a lot of capital with decent returns that are going higher. They also are consolidation candidates.”

 

Given depressed sector valuations, it may be hard to go wrong with almost any major bank or investment banking stock.

 

 

 

[Rasputin]

Mike Mayo upgraded BofA from sell o Outperform !!!!! LOL

 

BAC stock has underperformed and the timing to switch into the bullish camp seems rather good - what is there to laugh about?

 

it's funny because Mayo WAS a BAC perma bear and he's a joke. 

[Rasputin]

Fed says 2016 CCAR results expected by June 30, 2016.  Last year, we got results in March.  Any explanation?

 

http://www.federalreserve.gov/bankinforeg/ccar.htm

 

WFC complained that their employees can't enjoy christmas break.  Starting 2016 CCAR, CCAR submission isn't due until April (it was due in January for prior CCAR).