BAC-WT - Bank of America Warrants

[Rasputin]

1.  WSJ article Banks’ Golden Deposits Are Heading Out the Door  with RBC analyst quoted "Non-interest-bearing deposits are the goose that lays the golden egg for a bank, their decline is one reason the profit boost from rising interest rates will likely end over the next year or so." 

 

2.  Auto sales is slowing, existing home sales is slowing, mortgage pipeline sucks, recession is coming, loan losses are going up, earnings will be decimated

 

3.  Democrats will take over the House, investigate banks, litigation costs will go up

 

4.  Tightening capital requirement with CECL, SCB, CCYB vs Loosening capital expectation coming into 2018

 

5.  Brexit, Trade wars, China slowing down

 

6.  Other traders are selling the stocks, stock price keep coming down, why do I want to keep losing money? Might as well sell now and buy back later

[Viking]

1.  WSJ article Banks’ Golden Deposits Are Heading Out the Door  with RBC analyst quoted "Non-interest-bearing deposits are the goose that lays the golden egg for a bank, their decline is one reason the profit boost from rising interest rates will likely end over the next year or so." 

 

2.  Auto sales is slowing, existing home sales is slowing, mortgage pipeline sucks, recession is coming, loan losses are going up, earnings will be decimated

 

3.  Democrats will take over the House, investigate banks, litigation costs will go up

 

4.  Tightening capital requirement with CECL, SCB, CCYB vs Loosening capital expectation coming into 2018

 

5.  Brexit, Trade wars, China slowing down

 

6.  Other traders are selling the stocks, stock price keep coming down, why do I want to keep losing money? Might as well sell now and buy back later

Great summary of likely why the big banks are selling off so much . . Lots of fear right now.

[Rasputin]

another one, this time OCI losses!!!

 

https://www.thestreet.com/markets/jpmorgan-bank-of-america-racked-by-veiled-losses-on-bond-holdings-14748752

 

JPMorgan, Bank of America Racked by Veiled Losses on Bond Holdings

[John Hjorth]

Rasputin,

 

Nice to see you back.

 

I was almost about to ask you after your post #7351, if you were serious here [about selling]. Your post # 7353, combined with Viking's reply to your post #7351 [Viking obviously read that particular post of yours, like I tend to do], convinced [<-?] me how to read it.

 

I know from reading your posts that you are [have been? [the doubt somehow spins here a bit - still ...]] really heavy BAC, and adding to WFC.

 

Are you still adding to WFC?

[Rasputin]

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

[John Hjorth]

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

 

Thanks for confirmation here, Rasputin. [ : - ) ]

[CorpRaider]

Sheesh.  Did the yield curve invert or something?

[Dazel]

 

With regards to the $121m B warrants being underwater and not going to be exercised in this blood bath...the investors in B of A stock will benefit. If the stock was at $35 in an earlier scenario which was explained well it would really not make that much of difference on first look. The problem with that is that is if 121m shares were exersized even though B of A would have received cash for them at$30.79...they would have to buy them back. Cash is our problem we have too much of it and we are limited in How much stock we can buy back. This would take $3.7b out of our buyback as the 121m or 1% of the shares would have to be purchased back. If Bof A was allowed to buy back $50b in stock like the tech companies are the value over the longer term at these prices would be simply amazing. However, they are limited to what the fed allows....and to me the extra $3.7b that can be bought back because the warrants won’t be expertised is material. I am giddy that B of A and more so Citi can buy back at these fire sale prices. Mr. Buffett will be a 10% owner a hell of lot sooner at this level and the 121m warrants expiring are a gift.

[Dazel]

 

I would expect B of A and Citi (and most financials) to be talking to the Fed right now about increasing their 2018-19 buy back programs...Bof A boosted it $5b last year I believe about a month from now. The reasoning for this is their record earnings over the last 9 months....this is the best opportunity for investment they have had in a long time. I would like to see them take out very share they can right now....Nirvana. We  would be looking at more than 10% of citi’s shares cancelled and high single digits a B of A. Wow.

Apple is getting credit for it in the market place....I would rather the banks got it done quietly so the stocks don’t rise too quickly. Even with the Feds limited buy backs citi’s buy back is bigger than Apples and Bof A is close on a market cap % and they are a lot cheaper than Apple. This has Mr. Buffet’s long term strategy written all over it.

Both Bof A and Citi are growing earnings faster than Apple....that is funny isn’t it?

[OracleofCarolina]

Short write up in Barron’s today about the value of BAC. Just a rehash and of what the astute board members already know , nevertheless, we should see a Barron’s bump on Monday.

[EliG]

Short write up in Barron’s today about the value of BAC. Just a rehash and of what the astute board members already know , nevertheless, we should see a Barron’s bump on Monday.

 

Link:

 

https://www.barrons.com/articles/why-bank-of-americas-shares-look-attractive-1540600480

 

[OracleofCarolina]

If I am reading BRKs 10Q right, looks like Buffett bought another 5 billion in BAC stock. He probably brought more in October, so I am guessing he is at the maximum of 9.9% ownership of Bank of America. Nice!!

[gfp]

Yes, he added 200 million shares in the quarter - before the price declined to more attractive levels.  Virtually no press reported on it.  Now it will be a "surprise" when they file the 13f.  I even told Becky Quick about it and she couldn't see how it was disclosed in the report...

 

If I am reading BRKs 10Q right, looks like Buffett bought another 5 billion in BAC stock. He probably brought more in October, so I am guessing he is at the maximum of 9.9% ownership of Bank of America. Nice!!

[John Hjorth]

Yes, he added 200 million shares in the quarter - before the price declined to more attractive levels.  Virtually no press reported on it.  Now it will be a "surprise" when they file the 13f.  I even told Becky Quick about it and she couldn't see how it was disclosed in the report...

 

lol. This is almost killing me. Perhaps we should start calling her Becky Slow ...

[CorpRaider]

Yeah, seems cheap again.  I can't decide what to do.  I feel like I should avoid the investment banking business/problems to the extent I can (maybe go for WFC) or perhaps focus on smaller options that WEB can't get a lot of $$$ into anymore (e.g., USB, BBT, FCNCA, STI). 

[mjm]

HOUSTON (AP) — An ATM in the Houston area has been shut down and is guarded by law officers after mistakenly dispensing $100 bills instead of $10s and word of the glitch got out on social media.

 

Some Harris County sheriff's deputies protected the outdoor ATM after Sunday night's incident and notified Bank of America.

 

A bank statement Monday says a vendor incorrectly loaded $100 bills in place of $10 bills. Bank of America also says customers will be able to keep the additional dispensed money.

 

Officials with North Carolina-based Bank of America didn't say how much cash was wrongly dispensed.

 

merry christmas from BAC

[StubbleJumper]

HOUSTON (AP) — An ATM in the Houston area has been shut down and is guarded by law officers after mistakenly dispensing $100 bills instead of $10s and word of the glitch got out on social media.

 

Some Harris County sheriff's deputies protected the outdoor ATM after Sunday night's incident and notified Bank of America.

 

A bank statement Monday says a vendor incorrectly loaded $100 bills in place of $10 bills. Bank of America also says customers will be able to keep the additional dispensed money.

 

Officials with North Carolina-based Bank of America didn't say how much cash was wrongly dispensed.

 

merry christmas from BAC

 

 

Well, a single machine is not going to be material to BAC's results, but just out of interest, does anybody know who would likely end up paying for this mistake?  Would it be:

 

1) BAC

2) BAC's insurer

3) The vendor

4) The vendor's insurer

5) Other?

 

 

SJ

[Viking]

Here is an 8 minute interview with Moynihan, BAC CEO: https://www.cnbc.com/video/2018/12/04/bank-of-america-ceo-market-bearishness-doesnt-match-up-with-customer-confidence.html

 

Seeking Alpha Article: https://seekingalpha.com/article/4225867-bank-america-story-tell

- you can skip the article; read the comment section; in particular scroll down and read all of Strategic Investor’s comments which summarize BAC very well.

 

Here is a sample (there are more comments by Strategic Investor in the article):

Strategic Investor: “BAC's story is indeed expense management. But that is a slow steady grind and not prone to big valuation adjustments. The stock seems reasonably valued given banks high cost of equity - a reflection of the fact that banking is not all that productive: ROA is usually around 1% and only the leverage drives it much higher. BAC at 1.2% can use 9x leverage and get 11-12% ROE which represents an economic profit, albeit a small one. Yes, the bank is earning good returns on tangible equity, but that goodwill and the costs of all those deals will weigh on ROE for a very long time.

 

Of course, if they can keep buying back 8% of the stock every year, well, then this becomes a tontine, a very attractive tontine, particularly if costs can continue to be cut in the process.

 

I cannot believe that in 2018 people are still writing about the positive benefits of interest rates, even as those benefits fail to emerge. Sure a linear shift in the curve might produce a benefit, but how probable is that shift (hasn't happened so far)? How long can that benefit be sustained before the cost of funding curve adjusts to reflect that such improved profitability makes deposits even more attractive (and the competition for them drives rates up)? And what sort of profitability changes do you get with NON-linear changes in the curve, the sort we are actually experiencing?

 

Note also that much of the growth in financial profitability over the great rate decline of 1981-2015 was banks getting to double (or triple or ....) dip by getting borrowers to refinance. Best of all possible worlds, the bank gets lots of new origination fees and underwriting fees while their investor clients hold the bag of having their assets called. Borrowers will be much less inclined to refinance during a secular rate rise. Also, higher rates will be a weight on asset prices which could impact asset management fees (already under pressure from indexation) as well as weakening the value of collateral. Banks will be less inclined to offer piggyback mortgages if house prices aren't rising, so there may be fewer transactions overall, at lower prices financed with more equity. Not exactly paradise.

 

Finally, there is all of the innovation happening in the financial services space - innovation that will require investment, much of which may be wasted.

 

Is BAC a good bank? Yes. Is it doing the right things to improve operations? It appears to be. Will long term holders get nice dividends? Yes, particularly if you had the foresight to invest in the late 2011 or even early 2016 period when the stock was incredibly cheap. At $28 and change, it will be a slow grind for an investor today. A steady return, sure. Market beating perhaps, but only because market returns are set to be pretty modest.”

[Viking]

More comments from the Seeking Alpha article; questions to and answers from Strategic Investor.

 

ThreeA Comment “Interesting. Maybe you can help explain the $6billion BAC buy last Q by Berkshire Hathaway at your perceived ‘high levels’?”

 

Strategic Investor Reply: “Dunno - while I read Buffett (particularly early Buffett) I don't sit around thinking about why he is doing something or not, since I am in a very different place as an investor than he / BRK is.

 

My offhand guess is that his stated objective is to beat the S&P by a few points a year, maybe 2%. BAC can probably do that (read my comment again, I said as much). Given the amount of capital he has to deploy, it is probably a good way for him to lock in market beating returns. I just don't think market returns are particularly attractive. BAC is not cheap. Those who remember BAC in the $40s and $50s might have forgotten that it earned $4 a share at the time. It did so with immense capital efficiency because the 2005 mortgage market created huge opportunities for banks to generate very large fees without having to expand the balance sheet, as the demand for securitization was simply rabid.

 

RoA went to 1.5%, which is well above normal and well above today's levels. Regulation and the secular rise in interest rates are likely to change both investor appetite for long duration assets and for borrowers to refi. Don't forget much of the appetite was driven by the willingness of borrowers to pay for 30 year rate locks only to refi and prepay. Lenders got huge windfalls on options borrowers didn't really need. Banks got their share of the commission on all of that.

 

With rising rates, borrowers will exercise those options and let debt stand.

 

We are entering a world where the financial economy is unlikely to grow much faster than the real economy. This is quite a contrast to what happened from the late 1970s to mid 2010s, when valuations just went up and up and everyone rushed to securitize everything.

 

This is why costs and cost control will be so important. I think this should favor the large banks and BAC has the most scope to improve on this metric, which is why I am long.

 

Can BAC rise much more? Sure, if costs can be taken out quickly, otherwise this will be a slow and steady grind in the right direction, which is my expected outcome.“

 

WG Investment Research Comment: “Strategic Investor, Great comment and you raise many valid points. Two quick thoughts:

(1) "A steady return, sure. Market beating perhaps, but only because market returns are set to be pretty modest." <- there's nothing wrong with market beating performance, right?

(2) For you thoughts on rising rates, the real benefits have not materialized yet but a 3% YoY increase in NII (~700M) is not chump change either.”

 

Strategic Investor Reply:

“NII may decline because the yield curve is starting to invert. The linear shift in the curve is not happening, the curve is twisting and this changes the profit profile significantly.”

 

“I should add that $700m on 10bn shares is 7 cents, which is basically chump change. Capitalize it at 10% and you have 70 cents in share value. This is something, particularly if your cost basis is $7, but not going to make you

 

It is hard to conceive large numbers, but this is a $2trn balance sheet, $700mn is three 10,000ths of the balance sheet. You can increase NII just by adding a small amount to the balance sheet. In an economy growing 4-5% nominal, we would expect credit to expand at a similar rate and therefore the balance sheet to expand at this rate. Without increasing the productivity of the assets, we would expect NII to rise comparably.

 

To have strong returns you need more than an increase in assets or book value per share (although as you say, these do count). To have a higher multiple, you need an improvement in asset efficiency - this is why cost cuts matter. NIM expansion would work, too, but NIM expansion is exceedingly difficult. Debt and credit markets are very efficient and credit finds a level. The big banks can offer fringe benefits that enable them to have a lower cost of borrowing; perhaps they can also manage some credits better as well and therefore reach for more risk and higher yields, but regulators are much more skeptical of this than they once were (though perhaps also less skeptical than at other times; regulatory risk appetite also has seasons).

 

Point is - operating costs are going to turn out to be the source of efficiency. Here, it must be said, BAC has been steadfast and has a good story to tell. Moynihan has been talking about this pretty much since he started. I remain cautiously optimistic that he will drive the bank towards an efficiency ratio of 50%.”

 

 

 

 

[plato1976]

Rasputin,

 

I am wondering if you considered the scenario if the economy goes into recession in the near future and whether in such a situation the current bac valuation looks attractive?

 

I don't believe the recession is imminent but just not sure about the calculation

 

 

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

[Spekulatius]

Rasputin,

 

I am wondering if you considered the scenario if the economy goes into recession in the near future and whether in such a situation the current bac valuation looks attractive?

 

I don't believe the recession is imminent but just not sure about the calculation

 

 

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

 

No bank stock is going to work out if we go into recession.FWIW, GS trades st tangible book value today. That’s a bargain in my book. BAC goes for around ~1.6 x tangible book and they still have a substantial investment banking operation (30%+ of their profits).

[gary17]

Rasputin,

 

I am wondering if you considered the scenario if the economy goes into recession in the near future and whether in such a situation the current bac valuation looks attractive?

 

I don't believe the recession is imminent but just not sure about the calculation

 

 

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

 

No bank stock is going to work out if we go into recession.FWIW, GS trades st tangible book value today. That’s a bargain only book. BAC goes for sound ~1.6 x tangible book and they still have a substantial investment banking operation (30%+ of their profits).

 

Seems quite clear Banks don’t perform that well during good times and on first sign of recession they are the first to do very poorly !

[Viking]

Speculatius, your caution with BAC earlier this year was spot on. Clearly, i was too optomistic :-)

[Rasputin]

Hi Plato,

 

Yes, I have.  It's not very sophisticated.

 

I basically assume the fed will reverse all of the rate hikes they have done since 2016, yield curve went back to what it was in 2015, and i assume avg loan balance will return to 2015 level. 

 

BAC NII in 2015 was $38.958 B (trough since the merger with Merrill).

 

My recession scenario starts Jan 1 2019, so i assume 2019 NII will be equal to 2015 or $38.958 B

 

I then reduce Non Interest Income by about 10% from my 2018 estimate level to $38.9 B

 

I increase provision for credit losses to double this year net charge off or $7.6 B (this may be earned back in subsequent years as credit trend stop worsening)

 

I reduce non interest expense by $2 B (do BAC really need to spend $10 B on technology per year in a bad economy? they can easily reduce it by $1 B, plus some layoffs) from $53.5 B in 2018 to $51.5 B (also the FDIC special assessment ended in Q3 2018, will help maybe $600 million per year, but that's included in my $2 B expense reduction).

 

So, $38.96 B of NII plus $38.9 B of non II (hey! they are the same) minus $7.6 B in provisions minus $51.5 B in Non interest expense equal $18.76 B in pretax income

 

20% tax rate, $1.25 B in pref dividends give us $13.76 B of net income to shareholders

 

Let's assume share repurchase ended on Dec 31 2018 for the duration of the recession, so there will be roughly 10 B of diluted sh o/s, I get $1.38 eps in recession.

 

Price today is roughly 20 times trough eps. 

 

My time horizon is far longer than most people (I have owned BAC for over 7 years now), and I believe US economy will always bounces back to even greater height, so I can see after recession is over, plus 2-3 years, BAC will earn $3.25 per share (if there is no recession between now and 2022, I see $3.25 by 2022) and it will just grind higher.  For BAC and also WFC, they don't need to retain earnings for further eps gain, so I value this eps = distributable cash flow or fcf. 

 

Please check my math and play around with various assumptions, but that's one of my recession scenario.

 

Now that I have posted my simple model, all I want for Christmas is for BAC-WT A to expire worthless :)

 

Rasputin,

 

I am wondering if you considered the scenario if the economy goes into recession in the near future and whether in such a situation the current bac valuation looks attractive?

 

I don't believe the recession is imminent but just not sure about the calculation

 

 

John,

 

Yes, largest holding is bac, bought both bac and wfc today.

[John Hjorth]

Gents,

 

Who are they, that are dumping stocks in the large US banks for several month now to an extent, that the large buyback programmes in action in the banks actually "have problems" keeping up with?