BAC-WT - Bank of America Warrants

[Viking]

Long dated US treasuries look to be breaking out to the upside, likely due to strong economic growth in the US. This is good news for the big banks as it is good for net interest margin.

[benchmark]

https://www.wsj.com/articles/bank-of-america-is-missing-out-on-wall-streets-boom-1539428400

 

 

[Viking]

Benchmark, of the major business units at BAC, what they are doing with investment banking has been a question mark for me. It appears that they want the total bank to be ‘safe’ and they are trying to run the investment banking unit within this overarching objective. The result is a business that looks to be treading water, which is never a good thing for morale and retention (you will lose your good people who will not want to be in a straitjacket). We will get another update when they report Monday.

 

Citi results looked in line and JPM was ok (expenses grew faster than revenue which i think surprised some). Bottom line, the big banks continie to earn massive amiunts of money and buy back a bunch of stock. The sector certainly is out of favour at the moment :-)

[Spekulatius]

Benchmark, of the major business units at BAC, what they are doing with investment banking has been a question mark for me. It appears that they want the total bank to be ‘safe’ and they are trying to run the investment banking unit within this overarching objective. The result is a business that looks to be treading water, which is never a good thing for morale and retention (you will lose your good people who will not want to be in a straitjacket). We will get another update when they report Monday.

 

Citi results looked in line and JPM was ok (expenses grew faster than revenue which i think surprised some). Bottom line, the big banks continie to earn massive amiunts of money and buy back a bunch of stock. The sector certainly is out of favour at the moment :-)

 

They could just spin of the investment ban and Merril Lynch will be born again. But at what multiple would the investment banking standalone trade? GS trades at 1.1x book and that’s a better operation than BAC investment banking operations. JEF trades below tangible book.

 

I can buy a bank like PNC at 11.5x earnings and they don’t own any investment banking assets. So I don’t think BAC can unlock much value by spinning of investment banking right now.

[benchmark]

Earning is pretty good, though investment banking still lags. At less than $28, it's trading less than 10x of next year's revenue. Will continue to hold.

 

https://www.fool.com/earnings/call-transcripts/2018/10/15/bank-of-america-corporation-bac-q3-2018-earnings-c.aspx

 

 

[Viking]

Benchmark, i have listened to some of the conference call and done a quick read of the results and i agree overall a solid report. The tone from management on the call was a little defensive and Moynihan is not a very polished speaker.

 

It appears that BAC is being VERY selective in how it is running the business. The reason they gave for why commercial loan growth was lagging was that they were not prepared to lower their standards simply to drive loan growth. This also is perhaps the reason their investment banking unit is underperforming. This is really a do you trust management type of question. It is hard to answer given we have not had the opportunity to see how the bank (with current management) and their loan book performs in a downturn. I have no doubt that the bank will perform better than in 2008. The real question is how will they perform versus their big bank peers. I am sipping a little of the Kool Aid thinking they will perform better than average but i do not have a strong conviction.

 

I am happy to hold my shares. BAC pays a 2% dividend and now they are buying about 175 million shares back every quarter (about 1.75%). The key for me is US GDP growth. As long as the US economy continues to chug along the big banks are going deliver strong results.

[onyx1]

The market (and TV commentators) assume BAC is a 3% earnings grower due to 3% YoY loan growth. 

 

This ignores:

 

1) elevated corporate cash levels from the tax cut and repatriation, (a temporary softening of loan demand)

2) the BAC pledge to freeze expenses at 2018 levels for the next two years.

3) a share repurchase rate that will continue to reduce share count by 5% per year.

 

At 9x-10x 2019, BAC is attractive even with 3% earnings growth.  But with 7% deposit growth, 5% repurchases,

0% expense growth, EPS will grow meaningfully higher than 3%.

 

Buybacks begin again tomorrow morning.

[gary17]

what would the EPs growth be buy your estimate?

[onyx1]

I'm not good enough to pinpoint, but I wouldn't be surprised to see 10% YoY.

 

On top of everything else, a 100bp parrellel shift in rates will add $0.22 to EPS which alone is roughly 8% EPS growth.

[HalfMeasure]

The market (and TV commentators) assume BAC is a 3% earnings grower due to 3% YoY loan growth. 

 

This ignores:

 

1) elevated corporate cash levels from the tax cut and repatriation, (a temporary softening of loan demand)

2) the BAC pledge to freeze expenses at 2018 levels for the next two years.

3) a share repurchase rate that will continue to reduce share count by 5% per year.

 

At 9x-10x 2019, BAC is attractive even with 3% earnings growth.  But with 7% deposit growth, 5% repurchases,

0% expense growth, EPS will grow meaningfully higher than 3%.

 

Buybacks begin again tomorrow morning.

 

I think one of the issues (at least on sentiment) is that the market and commentators expected 1) to factor in immediately, even though most macro textbooks will tell you fiscal stimulus feeds into the system with a lag.

[gary17]

I'm not good enough to pinpoint, but I wouldn't be surprised to see 10% YoY.

 

On top of everything else, a 100bp parrellel shift in rates will add $0.22 to EPS which alone is roughly 8% EPS growth.

 

that’s is more or less what i read is the thesis on BAC; but seems like the market disagrees!

[Rasputin]

If I have to reason why the market is pricing trillionaire banks cheaply again, I would say, there are 2 significant uncertainties for 2019 CCAR and 2020 CCAR that could be a concern for traders with less than a 5 year time horizon:

 

1.  CECL and its incorporation into CCAR (the fed has said no CECL for 2019 CCAR)

 

2.  SCB and SLB (start in 2019 CCAR)

 

The impact to all trillionaires maybe a temporary significant drop in near term share buyback $$$.

Among the trillionaires, the bank most resilient (least impacted) by these 2 factors in terms of current capital adequacy is WFC. 

 

 

[Viking]

I'm not good enough to pinpoint, but I wouldn't be surprised to see 10% YoY.

 

On top of everything else, a 100bp parrellel shift in rates will add $0.22 to EPS which alone is roughly 8% EPS growth.

 

that’s is more or less what i read is the thesis on BAC; but seems like the market disagrees!

 

 

RBC is estimating BAC will earn $2.60/share in 2018 and $2.90/share in 2019. This = 11.5% increase in eps. If GDP grows at 2.5 to 3% in 2019 i think RBC is too low. Share repurchases will reduce shares outstanding by about 6%. If the Fed continues to raise rates (Dec and 3 times next year) this will help. The kicker is the commitment to hold costs at $53 billion in 2019 and 2020.

[John Hjorth]

what would the EPs growth be buy your estimate?

I'm not good enough to pinpoint, but I wouldn't be surprised to see 10% YoY.

 

On top of everything else, a 100bp parrellel shift in rates will add $0.22 to EPS which alone is roughly 8% EPS growth.

The market (and TV commentators) assume BAC is a 3% earnings grower due to 3% YoY loan growth. 

 

This ignores:

 

1) elevated corporate cash levels from the tax cut and repatriation, (a temporary softening of loan demand)

2) the BAC pledge to freeze expenses at 2018 levels for the next two years.

3) a share repurchase rate that will continue to reduce share count by 5% per year.

 

At 9x-10x 2019, BAC is attractive even with 3% earnings growth.  But with 7% deposit growth, 5% repurchases,

0% expense growth, EPS will grow meaningfully higher than 3%.

 

Buybacks begin again tomorrow morning.

 

I tend strongly to agree with onyx here, because of the ongoing evolution we see in operational leverage combined with growth, and especially because of the ongoing share buybacks:

 

BAC issued & outstanding shares end 2018Q3 [in millions] : 9,858.3^[1]

BAC issued & outstanding shares end 2018Q2 [in millions] : 10,012.7^[1]

BAC issued & outstanding shares decrease during 2018Q3 [in millions] : 154.4^[1]

 

So BAC issued & outstanding shares decrease was 1.54 percent during the 2018Q3. Extrapolating that figure roughly [depending on actual share market price etc.] while BAC buying back going forward to end 2019Q2 actually adds [again roughly] 5 - 6 percent progress to BAC EPS per year [Ceteris paribus].

 

- - - o 0 o - - -

 

[1] Source: BAC 2018Q3 quarterly earnings information - Supplemental Information, p. 40.

[Viking]

Am i understanding this correctly... if the stock price does not go over $30.79 by Oct 24 then the 121 million warrants will expire worthless? Given the warrants were trading at $29.46 on Sept 28 (quarter end), which is below the strike price of $30.79, they will not be included in BAC diluted share count? This will be a silver lining for existing shareholders with the recent priceweakness we have seen.

 

CHARLOTTE, N.C.--(BUSINESS WIRE)--Oct. 16, 2018-- Bank of America Corporation today reminded holders of warrants issued October 28, 2008 to purchase shares of the Company’s common stock (CUSIP No. 060505 15 3) (the “Warrants”), that the Warrants will expire on Monday, October 29, 2018.

 

The Warrants were originally issued to the United States Department of the Treasury on October 28, 2008, and were offered to the public on March 9, 2010. The Warrants trade on the New York Stock Exchange (“NYSE”) under the symbol BAC WS B. The NYSE has notified the Company that it will suspend trading in the Warrants after the close of trading on October 24, 2018 so that trades can be settled by October 29, 2018.

 

As of September 30, 2018, there were 121,584,090 Warrants outstanding. Each Warrant represents the right to purchase one share of the Company’s common stock at an exercise price of $30.79 per share.

 

A holder of Warrants can obtain further information on exercising the Warrants by contacting their broker. Brokers are encouraged to contact Computershare, the Company’s warrant agent, or The Depository Trust & Clearing Corporation in advance of the expiration date to confirm procedures for exercising Warrants and payment of the exercise price.

 

Any Warrants not exercised prior to the expiration time on October 29, 2018 will expire and be canceled, and the holder will not receive any shares of the Company’s common stock for its unexercised Warrants.

[onyx1]

Am i understanding this correctly... if the stock price does not go over $30.79 by Oct 24 then the 121 million warrants will expire worthless? Given the warrants were trading at $29.46 on Sept 28 (quarter end), which is below the strike price of $30.79, they will not be included in BAC diluted share count? This will be a silver lining for existing shareholders with the recent priceweakness we have seen.

 

CHARLOTTE, N.C.--(BUSINESS WIRE)--Oct. 16, 2018-- Bank of America Corporation today reminded holders of warrants issued October 28, 2008 to purchase shares of the Company’s common stock (CUSIP No. 060505 15 3) (the “Warrants”), that the Warrants will expire on Monday, October 29, 2018.

 

The Warrants were originally issued to the United States Department of the Treasury on October 28, 2008, and were offered to the public on March 9, 2010. The Warrants trade on the New York Stock Exchange (“NYSE”) under the symbol BAC WS B. The NYSE has notified the Company that it will suspend trading in the Warrants after the close of trading on October 24, 2018 so that trades can be settled by October 29, 2018.

 

As of September 30, 2018, there were 121,584,090 Warrants outstanding. Each Warrant represents the right to purchase one share of the Company’s common stock at an exercise price of $30.79 per share.

 

A holder of Warrants can obtain further information on exercising the Warrants by contacting their broker. Brokers are encouraged to contact Computershare, the Company’s warrant agent, or The Depository Trust & Clearing Corporation in advance of the expiration date to confirm procedures for exercising Warrants and payment of the exercise price.

 

Any Warrants not exercised prior to the expiration time on October 29, 2018 will expire and be canceled, and the holder will not receive any shares of the Company’s common stock for its unexercised Warrants.

 

Good point.  In my opinion, BAC selling shares at $30.79 is value destructive so I hope for expiration.  BAC's repurchase history would suggest the same as they bought shares in March of 2018 at an average of $32.18.

[StubbleJumper]

Am i understanding this correctly... if the stock price does not go over $30.79 by Oct 24 then the 121 million warrants will expire worthless? Given the warrants were trading at $29.46 on Sept 28 (quarter end), which is below the strike price of $30.79, they will not be included in BAC diluted share count? This will be a silver lining for existing shareholders with the recent priceweakness we have seen.

 

CHARLOTTE, N.C.--(BUSINESS WIRE)--Oct. 16, 2018-- Bank of America Corporation today reminded holders of warrants issued October 28, 2008 to purchase shares of the Company’s common stock (CUSIP No. 060505 15 3) (the “Warrants”), that the Warrants will expire on Monday, October 29, 2018.

 

The Warrants were originally issued to the United States Department of the Treasury on October 28, 2008, and were offered to the public on March 9, 2010. The Warrants trade on the New York Stock Exchange (“NYSE”) under the symbol BAC WS B. The NYSE has notified the Company that it will suspend trading in the Warrants after the close of trading on October 24, 2018 so that trades can be settled by October 29, 2018.

 

As of September 30, 2018, there were 121,584,090 Warrants outstanding. Each Warrant represents the right to purchase one share of the Company’s common stock at an exercise price of $30.79 per share.

 

A holder of Warrants can obtain further information on exercising the Warrants by contacting their broker. Brokers are encouraged to contact Computershare, the Company’s warrant agent, or The Depository Trust & Clearing Corporation in advance of the expiration date to confirm procedures for exercising Warrants and payment of the exercise price.

 

Any Warrants not exercised prior to the expiration time on October 29, 2018 will expire and be canceled, and the holder will not receive any shares of the Company’s common stock for its unexercised Warrants.

 

Good point.  In my opinion, BAC selling shares at $30.79 is value destructive so I hope for expiration.  BAC's repurchase history would suggest the same as they bought shares in March of 2018 at an average of $32.18.

 

 

 

 

Sure, the B warrants are probably value destructive if they are exercised, but it's not too material.  What would be "fair value"?  Would it be $34?  $35?  So, if the B holders exercise their warrants, they'd effectively expropriate how much of existing shareholder wealth?  121 m warrants X ($35-$30.79)= ~$500m.  With 10 billion common shares outstanding, they'd effectively expropriate what, 5 cents per share of value from existing shareholders?

 

It's better that they not get 5 cents of our value, but it's not really the end of the world if they do.

 

 

SJ

[Viking]

Agreed that 111 million shares are not a needle mover. However. It is like getting 2 more months of share buybacks which I will gladly take :-)

[Dynamic]

The warrant conversion price question is interesting. I've read people more knowledgeable than me who say that major option expiry dates often coincide with slightly unusual trading patterns, prices and volume if the price is close to the strike price of a popular contract. I wonder if the warrants' imminent expiry will cause any noticeable effect on the stock price.

[SlowAppreciation]

https://www.wsj.com/articles/banks-golden-deposits-are-heading-out-the-door-1540200600?mod=hp_lead_pos2

[Cigarbutt]

The following added as a complement to the above.

https://www.forbes.com/sites/greatspeculations/2018/09/10/why-have-net-interest-margins-trended-lower-for-some-of-the-largest-u-s-banks/#5cf6ced06fcb

[Viking]

The good news on net interest margin is it appears that as the Fed increases rates that the banks are not yet engaging in destructive competition. Yes, some of the increase is being passed on to some customers. However, i think the banks continue to be cautiously optomistic with how much they are having to pass on to customers (in aggregate). Moving forward, they will have to pass on a greater amount; definitely worth monitoring.

[gary17]

quite interesting big banks performing poorly in this environment. 

[John Hjorth]

quite interesting big banks performing poorly in this environment.

 

gary,

 

Is your comment about market price development?

[gary17]

quite interesting big banks performing poorly in this environment.

 

gary,

 

Is your comment about market price development?

YES!  i mean intrinsic value etc aside, i still like to know why the market price of BAC is decreasing - market can be wrong at times but can also be right most of the time.