BAC-WT - Bank of America Warrants

[ERICOPOLY]

Eric,

 

(1) do you know what a call report is?

(2) do you understand the difference between a call report and the 10Q?

(3) Why ad hominem instead of addressing the specific points?

 

(1)  No, I don't know what a call report is.

(2)  No.

(3)  Perhaps an impartial observer can point out where I am attacking either you or the bank or the regulators "ad hominem"?  Maybe you should just quote the passage because I for one don't see it.

 

For f's sakes, I am saying the total cost of funding as reported by WFC doesn't match the table, and that BAC's total cost of funding is higher than WFC's.  I said that perhaps the table is only looking at the cost of deposit funding, but BAC of course relies less on deposit funding than does WFC. 

 

Let's start with the ad hominem.  I say I am attacking the numbers... you say I am attacking the man.  Show me.

 

 

[PlanMaestro]

Thanks Eric. What I considered ad-hominem was instead lack of knowledge of regulatory reports and how they work.

[ERICOPOLY]

Thanks Eric. What I considered ad-hominem was instead lack of knowledge of regulatory reports and how they work.

 

Let me re-emphasize that I succeed with investing by coat-tailing on very competent investors.  People who are very competent and do the due diligence. 

 

Trust me, it's not false modesty!  I'm doing my best and don't be afraid to assume that I'm just an apprentice.

[PlanMaestro]

Then, sorry for being a blowhard. I wanted to clarify orders of magnitude, but the internet sometimes blurs intentions.

[hyten1]

plan

 

i thought call reports only include fdic insure aspect of the business? meaning for BAC anything that is not fdic insure are not require to be included in call reports.

 

hy

[returnonmycapital]

Thanks Eric. What I considered ad-hominem was instead lack of knowledge of regulatory reports and how they work.

 

Let me re-emphasize that I succeed with investing by coat-tailing on very competent investors.  People who are very competent and do the due diligence. 

 

Trust me, it's not false modesty!  I'm doing my best and don't be afraid to assume that I'm just an apprentice.

 

But the total cost of funding is what determines the NIM and in this regard, is it not better to follow Eric's train of thought? I didn't really understand the table supplied. I attack no one but I suggest the 10Q/K reports are more valuable than are these "call reports" - for us mere apprentices.

 

Plan, you should not be put out by some commentary. Eric thinks properly and what's more, he's got a good sense of humour; and both tend to work together. The rest of us wouldn't want that to change.

 

[returnonmycapital]

Perhaps the way to think about the the difference in funding costs between, say, WFC and BAC is to look at the structure of their balance sheet. Common equity and deposits are typically low cost, one could argue that today they are pretty much costless. WFC's cost of deposits is 19bps, BAC's is 20bps.  No real difference. Common shareholders do not think common equity is costless but in terms of a funding source, it pretty much is. There is no obligation to pay common dividends. If you put the two sources together, and compare them to total assets, you come up with a pretty good idea of who has the lower cost structure.

 

In WFC's case, they back 80% of their assets with "costless" funding (common equity + deposits). BAC only covers 60% which requires it to come up with a lot more wholesale funding (costly). Even if BAC's deposit costs were lower than 19bps, it would still have a higher cost of funding than a WFC or a USB.

 

Maybe that gets fixed. Probably not. 

[ERICOPOLY]

The difference in funding cost is 48 bps

 

The difference in cost of funds is just 4bps.

 

What we are talking about with the lollapalooza of catching up with Wells is the difference between a 1.3% ROA bank and a 1.6% ROA bank. That's a potential of $7 billion of extra profit, or around $0.6 of extra EPS.

 

 

Did you calculate "$7 billion of extra profit" by taking the entire $1,750 billion in average earning assets (as presented in the 10-Q) and multiplying by .004?  That's the only way the math works out to $7b.

 

However, the table you presented only mentions $1,414 billion for BAC's average earning assets.

 

So that would be only $5.6 billion pre-tax, or (at 35% tax rate) about $0.33 of extra EPS.

 

 

 

 

[Kraven]

I can't speak to what BAC's cost of funding is as compared to WFC, but I think people are talking past each other here.  It isn't an apples to apples comparison.  The chart Plan put up I believe relates only to the bank subs for each BHC and doesn't include any information on any other non-banking businesses.  So a bank like BAC is always going to have a higher cost of funds than a WFC since they have more and larger non bank related businesses that don't have the benefit of cheap deposits.

 

In terms of call reports they will only relate to the banking entities and not include info on the non-bank subs.  However, any time there is a direct comparison between an SEC filing and a call report, I'd go with the call report 100% of the time.  There is a difference between regulatory reporting and financial reporting and different sets up rules and requirements.  The regulatory reporting is going to be more exact as far as it goes.  In this case though there is no way to compare the numbers since the call report only has the bank info and nothing on any non bank subs.

 

I'd say for purposes of this discussion and given the nature of the topic, the SEC filings are going to have a better picture of what people were talking about.  Again though I am not sure it's as meaningful as people think.  It's always going to cost more to fund Merrill than a deposit based operation for example.

[PlanMaestro]

plan

 

i thought call reports only include fdic insure aspect of the business? meaning for BAC anything that is not fdic insure are not require to be included in call reports.

 

hy

 

That was what I was driving to. It is easier to get a comparison of the FDIC insured, deposit-based businesses of both BofA and Wells and evaluate their deposit franchises (basically the same).  Then you can go and extrapolate a separate NIM and ROA for the deposit-based and non-deposit parts (deposits are not fungible), and look for improvement opportunities. My end point is that NIM opportunities are probably scarce. Maybe some if BofA is willing to be more aggressive on the yield side and the retirement of debt and trups. But let's leave it there.

 

 

 

 

[PlanMaestro]

The 1.6% ROA is a normal environment 2002-2006 profitability of Wells, and the 1.3% is the equivalent for BAC. Considering that both have similar deposit franchises, maybe tiny bit better for Wells, the point I butchered was that 1.6% ROA could be a lollapalooza target for BAC if they improve operationally to a Wells level.

 

The difference in cost of funds is just 4bps.

 

What we are talking about with the lollapalooza of catching up with Wells is the difference between a 1.3% ROA bank and a 1.6% ROA bank. That's a potential of $7 billion of extra profit, or around $0.6 of extra EPS.

 

 

Did you calculate "$7 billion of extra profit" by taking the entire $1,750 billion in average earning assets (as presented in the 10-Q) and multiplying by .004?  That's the only way the math works out to $7b.

 

However, the table you presented only mentions $1,414 billion for BAC's average earning assets.

 

So that would be only $5.6 billion pre-tax, or (at 35% tax rate) about $0.33 of extra EPS.

[ERICOPOLY]

Plan just explained to me that deposits aren't fungible between the retail bank subsidiary / parent co / and merrill.

 

Well, I sort of did already understand that bit about the fungibility, except that they do in fact keep talking about this as a big opportunity. 

 

And remember those guys squealing about moving derivative liabilities into the retail bank?  Was that some sort of a scheme to use low cost deposits to fund liabilities, thus freeing up cash at Merrill or parent co to retire high cost debt?  Or, maybe I completely misunderstand what all the squealing was about when William Black was pounding the table about this last Fall 2011.

 

So... even if I'm wrong about that, are they just planning on moving some assets from the parent (or merrill) over to the retail bank (to be funded by low cost deposits), and that swap is essentially the deposit moving upstream to the parent (or over to merrill) and the asset in turn is brought down/across to the retail bank?

 

Help me out here, please.

 

There's some sort of scheme of fungibility here because Moynihan keeps talking about the great opportunity to replace high cost LT debt funding with cheap deposits, yet the retail bank itself only has something like $9.5b total in LT debt funding -- and most of it matures way out in the future.

[ERICOPOLY]

Here is an article (however accurate) about that:

 

http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

 

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

[rkbabang]

Here come the Fools:

 

It's Time to Buy Bank of America

 

 

[ERICOPOLY]

Plan,

What do you make of this in light of your "fungible" statement?

 

see slide 11:  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDc5MjE2fENoaWxkSUQ9NTEyNTcyfFR5cGU9MQ==&t=1

 

The greatest opportunity to reduce funding costs is continued reduction in long-term

debt as this expense is approximately 5X the cost of deposits and long-term debt is

one-third the amount of deposit funding

 

My take of this is that the bank is planning to significantly shrink their LT debt using deposit funding.

 

You seem very dismissive of the possibility.  Is managment off their rocker?

 

 

 

[dowfin1]

Eric,

 

I don't know much, but apparently there are restrictions on the bank entities transactions with the non-bank subs.  see the letter link from the FED website :

 

http://federalreserve.gov/bankinforeg/LegalInterpretations/federalreseract20100903.pdf

[PlanMaestro]

Eric, I think few have talked more about these subs/parent liquidity/capital issues in the BAC, AIG, GKK, and ZION's threads. And I've been consistent: whatever they can do on this regard, great.

 

Who wants expensive TruPs and debt when you have bank subsidiaries with large liquidity invested in treasuries and MBS (that is understatement when loan to deposits is around 70%).

 

BUT, there are restrictions for the FDIC-insured subs both in the flow of capital to the parent as well in the type of instruments they can buy. Most require approval from the regulators.

 

The most important tool is to dividend excess capital from the subs to retire expensive debt and hybrids at the holding, reducing their proportion over time. And that is what that BAC statement is most probably referring to. Same as AIG and most other financial holdings lately.

 

And if they can use some of that sub liquidity to buy some of the securities at Merrill or others fantastic (AIG did some of that with SunAmerica and Maiden Lane). But at this stage of the game I do not think there is much left.

 

Also, as I hinted it to you in the DMs, the subs/parent issues might also explain why the Buffett injection was not that moronic. But, I am sure you already had an intuition about all this and this discussion is about finding a more solid footing.

 

Plan,

What do you make of this in light of your "fungible" statement?

 

see slide 11:  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDc5MjE2fENoaWxkSUQ9NTEyNTcyfFR5cGU9MQ==&t=1

 

The greatest opportunity to reduce funding costs is continued reduction in long-term

debt as this expense is approximately 5X the cost of deposits and long-term debt is

one-third the amount of deposit funding

 

My take of this is that the bank is planning to significantly shrink their LT debt using deposit funding.

 

You seem very dismissive of the possibility.  Is managment off their rocker?

[ERICOPOLY]

Eric,

 

I don't know much, but apparently there are restrictions on the bank entities transactions with the non-bank subs.  see the letter link from the FED website :

 

http://federalreserve.gov/bankinforeg/LegalInterpretations/federalreseract20100903.pdf

 

You just gave a thirsty man a drink of water, thanks.

 

That explains that they are transferring loans underwritten by Merrill into BANA, and that they got an exemption under rule 23A allowing them to do so without eating into the additional 20% limit that rule 23A normally holds them to.

 

They have been granted this exemption because they successfully argued that they can better serve their clients who have relationships with both BANA and Merrill, and can significantly reduce costs by having a single team and technology platform to carry out the underwriting.

[PlanMaestro]

http://federalreserve.gov/bankinforeg/LegalInterpretations/federalreseract20100903.pdf

 

That was very good, thanks.

 

[ERICOPOLY]

WFC does however have higher yields than BAC does on what would seem to be retail-bank funded assets (so I'm not mixing apples-to-oranges I hope).  There are other asset categories that WFC dominates in yield (I think in all of them actually), but I'm not confident how much of BAC's equivalent assets are attributed to the retail bank.

 

So just for the consumer and commercial lending...

 

Getting all this info from latest 10-Qs:

 

Commercial loans (56 bps higher yield WFC vs BAC):

WFC  3.91%  $352 billion

BAC  3.35%  $319 billion

 

Consumer loans (34 bps higher yield WFC vs BAC):

WFC  5.23%  $424 billion

BAC  4.89%  $569 billion

 

 

Perhaps BAC could be earning an additional:

$1.78 billion from it's commerical loans if it had the same yield as WFC gets.

$1.93 billion from it's consumer loans if it had the same yield as WFC gets.

 

Put together that's $3.71 billion annually, or about 22 cents per share after 35% tax.

 

 

[mankap]

There is a  new presentation on BAC site which was presented by BAC CEo at Merril lynch conf.

It shows saving of $18B by 2015 from New BAC and LAS expenses.

 

http://investor.bankofamerica.com/phoenix.zhtml?p=irol-eventDetails&c=71595&eventID=4865732#fbid=P7Hl7GMx2HG

 

New BAC - Phase 1 Consumer Businesses excl. LAS

•$5B annualized savings target

•Expect completion near the end of 2013

New BAC – Phase 2 Corporate, Institutional and Wealth Management Businesses

•$3B annualized savings target

•Expect full implementation mid-2015 Legacy Assets & Servicing

•3Q12 expense of $3.4B, including $0.4B litigation

•Normalized quarterly rate expected to be near $500MM

•Driven by 60+ delinquent loan levels

 

 

[vinod1]

 

 

So just for the consumer and commercial lending...

 

Getting all this info from latest 10-Qs:

 

Commercial loans (56 bps higher yield WFC vs BAC):

WFC  3.91%  $352 billion

BAC  3.35%  $319 billion

 

Consumer loans (34 bps higher yield WFC vs BAC):

WFC  5.23%  $424 billion

BAC  4.89%  $569 billion

 

 

Perhaps BAC could be earning an additional:

$1.78 billion from it's commerical loans if it had the same yield as WFC gets.

$1.93 billion from it's consumer loans if it had the same yield as WFC gets.

 

Put together that's $3.71 billion annually, or about 22 cents per share after 35% tax.

 

I am not sure if we can extrapolate WFC yields to BAC for couple of reasons

 

1. Loan mix is not the same. BAC in fact has higher proportion of credit card loans for example, which would boost its consumer loan yields but also increase its loan losses. If BAC has changed the loan mix to 50% credit cards, its yield on consumer loans would shoot past WFC but so would loan losses.

 

2. Even with the same type of loan there are differences in underwriting approach which translates into different yields and losses - although one would assume that higher yields would translate into higher losses. Maybe WFC underwriting/culture/incentives are better than BAC.

 

Due to above it would be very difficult to make apples to apples comparison. I would think due to the differences in loan mix/loan quality there would always be some difference in yield.

 

Vinod

 

 

[ERICOPOLY]

 

 

So just for the consumer and commercial lending...

 

Getting all this info from latest 10-Qs:

 

Commercial loans (56 bps higher yield WFC vs BAC):

WFC  3.91%  $352 billion

BAC  3.35%  $319 billion

 

Consumer loans (34 bps higher yield WFC vs BAC):

WFC  5.23%  $424 billion

BAC  4.89%  $569 billion

 

 

Perhaps BAC could be earning an additional:

$1.78 billion from it's commerical loans if it had the same yield as WFC gets.

$1.93 billion from it's consumer loans if it had the same yield as WFC gets.

 

Put together that's $3.71 billion annually, or about 22 cents per share after 35% tax.

 

I am not sure if we can extrapolate WFC yields to BAC for couple of reasons

 

1. Loan mix is not the same. BAC in fact has higher proportion of credit card loans for example, which would boost its consumer loan yields but also increase its loan losses. If BAC has changed the loan mix to 50% credit cards, its yield on consumer loans would shoot past WFC but so would loan losses.

 

2. Even with the same type of loan there are differences in underwriting approach which translates into different yields and losses - although one would assume that higher yields would translate into higher losses. Maybe WFC underwriting/culture/incentives are better than BAC.

 

Due to above it would be very difficult to make apples to apples comparison. I would think due to the differences in loan mix/loan quality there would always be some difference in yield.

 

Vinod

 

I've seen the loan mix and I'm aware of the difference in yields, but what I'm saying is WFC's yield is higher in every category.

 

Plus, when BAC is the one with the HIGHER mix of high interest credit cards, the last thing I'd expect is for their overall loan yield to be lower.

 

 

Consumer Credit cards:

WFC:  12%

BAC:  10.04%  (yes, you're right, they have a much higher mix of credit cards).

 

Consumer Real Estate Loans:

WFC:  4.51%  First lien

WFC:  4.26% Second lien

BAC:  3.7%  residential mortgage  (presumably this is "first lien")

BAC:  3.77% home equity   

[vinod1]

 

I've seen the loan mix and I'm aware of the difference in yields, but what I'm saying is WFC's yield is higher in every category.

 

Plus, when BAC is the one with the HIGHER mix of high interest credit cards, the last thing I'd expect is for their overall loan yield to be lower.

 

 

Consumer Credit cards:

WFC:  12%

BAC:  10.04%  (yes, you're right, they have a much higher mix of credit cards).

 

Consumer Real Estate Loans:

WFC:  4.51%  First lien

WFC:  4.26% Second lien

BAC:  3.7%  residential mortgage  (presumably this is "first lien")

BAC:  3.77% home equity 

 

My assumption here is that the difference in yields reflect the mix of loans (sub-categories) within the same category. First lien or residential mortgage is made up of Prime, Alt-A, Sub Prime. WFC might have a different mix of Prime/Alt A/Sub Prime compared to BAC. Same with Credit cards, Prime/Sub Prime percentages would be different between the two banks. In this case we should not expect the Interest margin to converge between the two companies.

 

Analysts and some companies sometimes provide a more meaningful measure of NIM called Risk-adjusted NIM which is defined as below. This might be more meaningful measure but even this would not converge as this cannot really model the tail risk of more risky assets.

 

Risk-adjusted net interest margin = Net interest margin – (net charge-offs/earning assets)

 

Vinod

[ERICOPOLY]

In this case we should not expect the Interest margin to converge between the two companies.

 

Plan pretty much said that he also didn't expect improvement on the yield side.  However that was when I was mixing all of the business models together for BAC and comparing that yield to WFC.

 

Thus, I started down this road of showing that the yield on the WFC retail bank seems to blow the doors off the yield on the BAC retail bank.

 

To this you say there is probably not much room for improvement vs WFC.

 

If that's the case (and it may be), then there is something wrong with Plan's assumption that we can merely look at the cost of funding between the two banks and assume it will lead to equivalent levels of ROA in the Lollapallooza case where both banks execute operationally on the same level.

 

In other words, either:

A)  BAC's retail bank assets can yield the same as WFC's and thus we can merely look at cost of funding to reach conclusions

or

B)  We can't look merely at cost of funding to reach conclusions