BAC-WT - Bank of America Warrants

[ERICOPOLY]

I will wait until the Article 77 decision is made as BAC's liability could climb from $8.5B to $20B

 

That's only 68 cents per share after taxes.  Sort of a non-event almost considering that immediately afterwards the stock could be valued finally on a multiple of earnings power without people bringing up this legal stuff anymore.

 

 

I suppose if we believe the book value could otherwise be at $30 in 6 years...  it will merely be a $29.32 instead.  So it makes about 2.3% difference to the terminal stock price.

 

So why would you hold back on the purchase of the warrants?  It really doesn't make much different at all to the returns unless you believe the stock will take a big dive first (based on a negative legal outcome).  However given that the stock price is already discounted by approximately $90 billion below book, it might just rally instead.

[buylowersellhigh]

Anybody have any opinions on the BofA common vs warrants?  Which is better buy at the moment?

[wescobrk]

"I suppose if we believe the book value could otherwise be at $30 in 6 years...  it will merely be a $29.32 instead.  So it makes about 2.3% difference to the terminal stock price.

 

So why would you hold back on the purchase of the warrants?  It really doesn't make much different at all to the returns unless you believe the stock will take a big dive first (based on a negative legal outcome).  However given that the stock price is already discounted by approximately $90 billion below book, it might just rally instead."

 

And there is almost a difference of 60 billion with JPM yet they have the same earnings power starting in mid 2014. The market is discounting 50% upside to wait 18 months for a company that will produce nearly identical cash flows.

[LC]

Anybody have any opinions on the BofA common vs warrants?  Which is better buy at the moment?

The commons will probably be a smoother ride in terms of price volatility.

[buylowersellhigh]

http://www.thestreet.com/story/11834079/1/mbia-shares-jump-as-case-against-bank-of-america-strengthens.html?kval=dontmiss

[no_free_lunch]

Anybody have any opinions on the BofA common vs warrants?  Which is better buy at the moment?

 

I did the math on this the other day.  The way I modelled it, with dividends starting in 2014 and paying out at 3%, you basically need a share price in the high 20's for the warrants to have much advantage over the common.  Even then, I think at $30, I had $1 in the commons around $2.80 vs $3.60 in the warrants.  It's an edge but not enough, in my opinion, to justify the risk.  If you are anticipating a share price in the mid to high 30's, the warrants really start to shine through.

 

Personally I am long the BAC common and long the AIG warrants.  Due to the longer expiration, I came up with some fairly conservative numbers that had the AIG warrants almost double the return of the common (I believe it was about 5.5x vs 3x). 

[MYDemaray]

http://newsandinsight.thomsonreuters.com/Legal/News/2013/02_-_February/Bond_insurers_aren_t_the_only_winners_in_Rakoff_s_Flagstar_ruling/

 

Another from Alison Frankel...she's implying that Rakoff's ruling may give more ammo to private label investors, even though it was a monoline insurance ruling.

[kevin4u2]

Anybody have any opinions on the BofA common vs warrants?  Which is better buy at the moment?

Basically you have to make estimates for EPS & Dividend rate, and share buybacks between now and 2019.  Once you have those assumption in place you can then calculate what the final strike price and number of underlying shares per warrant will be.  I also capped ROTCE at 17%.

 

I made the following assumptions: EPS, 2013-2018 - $1.12, $1.64, $2.39, $3.08, $3.18, $3.46.  Dividends 2013-2018 - $0.16 ($0.04/qtr), $0.48, $1.20, 1.54, $1.59, $1.73.

 

In Jan 2019 I estimate the share price to be $45.50 in 2019 (2.1x TBV, which is conservative) and the warrant strike price to be $10.96 and the number of common shares per warrant to be adjusted to 1.21 per warrant (The A warrant will sell for $41.80/warrant Jan 2019).  If you crunch the numbers that is just over a 40% annual ROR for the warrants (an 6.8x gain). 

 

The common would have gone from $11.71/shr to $45.50/shr with $6.70/shr in dividends.  On a DCF basis that works out to be just over a 29% annual ROR for the common (3.7x gain). 

 

RBC just released a report that lays out the financial data for all of the Canadian & US banks (and EU and AUS banks) and some insurance companies.

 

Again, all the analysis above depends on your assumptions but the warrants give you much more upside due to the double levering effect.  I would add my terminal price of 2.1x TBV is conservative and may well be 2.5x TBV at that time.  All the large Canadian Banks sell for over 2.0x TBV today with RBC selling for 2.9x.  In the USA, US Bancorp sells at 2.6x TBV and M&T Bank at 2.3x TBV.  The median for the large Canadian Banks is 2.5x TBV.  The average for AUS banks is 2.5x TBV. 

 

At the end of the day it depend on the assumptions made.  As for me I'm sticking with the A warrants.

 

[jrallen81]

Not much reaction to the FBC/AGO ruling from Rakoff today. I would have thought it would at least be a mild incremental negative.

[MYDemaray]

Not much reaction to the FBC/AGO ruling from Rakoff today. I would have thought it would at least be a mild incremental negative.

 

What are you talking about?  The bank lost $1.2bn in market cap on the open from last night's close -- efficiently assimilating the additional billion Rakoff cost them...but then it turns out they had a "good hour" (Moynihan's words, not mine) and earned their way out of the hole by end of day.  (kidding, of course)

[ERICOPOLY]

Not much reaction to the FBC/AGO ruling from Rakoff today. I would have thought it would at least be a mild incremental negative.

 

The stock is discounted by $90b below BV.

 

Everybody think that's enough for these puny lawsuits?

 

[Sunrider]

Anybody have any opinions on the BofA common vs warrants?  Which is better buy at the moment?

Basically you have to make estimates for EPS & Dividend rate, and share buybacks between now and 2019.  Once you have those assumption in place you can then calculate what the final strike price and number of underlying shares per warrant will be.  I also capped ROTCE at 17%.

 

I made the following assumptions: EPS, 2013-2018 - $1.12, $1.64, $2.39, $3.08, $3.18, $3.46.  Dividends 2013-2018 - $0.16 ($0.04/qtr), $0.48, $1.20, 1.54, $1.59, $1.73.

 

In Jan 2019 I estimate the share price to be $45.50 in 2019 (2.1x TBV, which is conservative) and the warrant strike price to be $10.96 and the number of common shares per warrant to be adjusted to 1.21 per warrant (The A warrant will sell for $41.80/warrant Jan 2019).  If you crunch the numbers that is just over a 40% annual ROR for the warrants (an 6.8x gain). 

 

The common would have gone from $11.71/shr to $45.50/shr with $6.70/shr in dividends.  On a DCF basis that works out to be just over a 29% annual ROR for the common (3.7x gain). 

 

RBC just released a report that lays out the financial data for all of the Canadian & US banks (and EU and AUS banks) and some insurance companies.

 

Again, all the analysis above depends on your assumptions but the warrants give you much more upside due to the double levering effect.  I would add my terminal price of 2.1x TBV is conservative and may well be 2.5x TBV at that time.  All the large Canadian Banks sell for over 2.0x TBV today with RBC selling for 2.9x.  In the USA, US Bancorp sells at 2.6x TBV and M&T Bank at 2.3x TBV.  The median for the large Canadian Banks is 2.5x TBV.  The average for AUS banks is 2.5x TBV. 

 

At the end of the day it depend on the assumptions made.  As for me I'm sticking with the A warrants.

 

Can you link that RBC report, please? Can't seem to find it on their site?

 

Thanks - C.

[finetrader]

She has a short term view on things, but a 15$ stock price by year end like she seems to believe would suit me very well.

 

 

http://www.gurufocus.com/news/207722/meredith-whitney-bofa-is-stock-to-own-without-a-doubt

[kevin4u2]

 

Can you link that RBC report, please? Can't seem to find it on their site?

 

Thanks - C.

 

Check your inbox.  Kevin

[wescobrk]

I don't think I can post whole article but here is a snippet in today's FT. It goes on to say it is currently earning 9% about half of jp.

 

 

Alastair Borthwick, BofA’s new head of commercial banking, says he is investing in the business, adding about 50 bankers as a first step even as more automation brings job losses in administrative roles.

“We have invested and we will invest more,” he said, while declining to give a dollar value. “We hope to take some market share.”

 

[wescobrk]

Edit the 9% number is from 2011

[buylowersellhigh]

Don't know how accurate this is, but..

 

http://www.fool.com/investing/general/2013/02/02/chart-bank-of-americas-remaining-legal-liability.aspx

[plato1976]

Always wondering how big the impact will be from a dramatic rate hike.

If it's gradual I think those banks can absorb it

but I am not sure it's all in a sudden

 

http://finance.fortune.cnn.com/2013/02/11/banks-bond-bubble/?source=yahoo_quote

 

but I doubt this:

 

"B of A appears to have around 90% of its portfolio, or $266 billion, in bonds that won't come due for 10 years or more.

"

 

90% seems way too high , and I just don't trust this number.

 

/plato1976

 

Don't know how accurate this is, but..

 

http://www.fool.com/investing/general/2013/02/02/chart-bank-of-americas-remaining-legal-liability.aspx

[Uccmal]

plato, I dont know this for sure, but I am betting that some of those nasty derivatives the banks are all accused of holding, are probably interest rate swaps for muting such an event. 

 

Barring a sudden hike in rates which seems unlikely for now, I would think slowly rising interest rates will be a wash for the big guys, or even a significant benefit.  They have all been retiring long term debt, and/or replacing it with much cheaper long duration debt.  Higher interest rates generally improve the Net Interest Margin on loans versus deposits. 

 

I figure that we see the fed backing off on QE first and then hiking rates sometime next year in measured steps.  Inflation is very low.  Since inflation is related to labour there is no reason to suggest it will come on strong anytime soon. 

[dcollon]

Some comments from an analyst:

 

BAC - Here's why BAC should continue to close in on 1.0x TBV

 

Stock buybacks and preferred equity redemptions will likely drive BAC's CCAR requests

 

We expect BAC to redeem at least $5.5bn of preferred equity: As shown on Table 1, BAC has $2.86bn of preferred equity at a cost of 8.2% that is callable on 5/1/13 and $2.67bn at 8.625% that is callable on 5/28/13. We expect BAC to redeem each of these preferreds as soon as they are callable. BAC could also redeem a $951mn piece costing 7.25%. We expect BAC to receive approval to redeem these preferreds during the 1Q13 CCAR. The annual interest savings would be about $535mn or about $0.05 per share. 

 

Common stock buybacks over dividends: We also think BAC will seek Fed authorization to buyback $4-5bn of common equity or about 30-35% of our estimate for its 2013 net income of nearly $14bn. We foresee a net buyback of $1.5-2.0bn after $2.5-3.0bn of issuance for stock-based incentive comp. Also, as long as BAC is trading at or below 1x TBV, we think mgmt will focus on buying back stock and redeeming expensive preferred equity instead of raising the common dividend (which probably requires a better track record of GAAP earnings consistency than BAC has established through 3Q12).   

 

Basel 3 capital ratios should continue to surge: Investors should also note that in 2013 and beyond, BAC should be able to utilize its $28.5bn DTA. Thus, it will likely accrue regulatory capital at nearly the rate of its pre-tax earnings instead of its after-tax earnings. We also expect an additional modest reduction in B3 RWAs. Thus, if our stock buyback assumption is correct, BAC should finish 2013 with a B3 Tier 1 common equity ratio of about 10.7%.   

 

Thus, BAC should continue to drive toward 1x TBV based on: 1) It should finish 2013 with a B3T1C ratio above 10.5% (well above its G-SIB min. of 8.5%), which means BAC should have huge firepower to buy back stock in 2014-15. 2) Even if BAC has to absorb another $5-$10bn of mtge repo costs (above our $2-4bn est.), that would only reduce its B3T1C ratio by 25-50bps and would have no material impact on its long-term earnings power. 3) We conservatively forecast ROTCE of 9.5% in 2014 & 10.5% in 2015. 4) As BAC continues to de-risk, it will become a large (but lower risk and more efficient) US-based consumer and commercial bank with Merrill Lynch attached, and its ROTCE should consistently exceed 10%. We think large-cap value PMs will pay at least 1x TBV for that, and our year-end 2013 TBV estimate is $14.65.   

 

At our recent banking conference, CFO Bruce Thompson remained upbeat and noted the following: 1) expense saves are on track with additional New BAC savings of at least $600mn quarterly and LAS savings of at least $1bn quarterly from 4Q12 to 4Q13 (i.e. $6.4bn of annualized savings over the next 12 months), 2) Mgmt is very focused on holding the line on core op. costs and delivering the savings to the bottom line. And 3) $22.5bn is a core quarterly revenue run-rate from which BAC can grow based on stable quarterly NII of ~$10.5bn this year (and perhaps some growth in 2014) as well as growth in its Wealth Mgmt, investment banking, and capital markets businesses. 

 

[racemize]

That is a lot of stock based comp!  I hadn't thought of that. I would think there would be a token dividend raise too, though. (Hoping for 10-16 cents annually).

[Liberty]

New 52wk high.

[MrB]

From Reuters, sorry no link

 

  In Bank of America, optionMonster systems detected the purchase of more than

17,000 February $12.50 strike calls, expiring this Friday, for 1 to 5 cents per

contract against open interest of just 4,056 contracts. The shares rose 3.62

percent to $12.29 near the close.

[fareastwarriors]

A Legal Wind Doesn't Blow BofA's Way .

 

 

http://professional.wsj.com/article/SB10001424127887324432004578302024144214066.html?mod=markets_newsreel&mg=reno64-wsj

 

 

Bank of America's BAC stock is on a tear, but one trend hasn't been its friend: legal decisions in disputes over mortgages guaranteed by bond insurers or sold to investors.

 

BofA contends loans in such disputes should be individually reviewed, rather than subject to sampling. That would make attempts to sue the bank more complex and time-consuming. The bank also argues that parties claiming damages should have to show that breaches of representations and warranties for mortgages led directly to a loss—as opposed to other factors such as the housing-market collapse. Again, that would make it far harder to prove damages against BofA.

 

But last week presented another blow to those arguments. In a decision in litigation between Flagstar Bancorp FBC and insurer Assured Guaranty, AGO U.S. District Judge Jed Rakoff sided with Assured—essentially saying that sampling was valid and that it was enough to show breaches of lending criteria only increased the risk of loss, not led directly to it.

 

 

Although BofA wasn't party to the case, Judge Rakoff's ruling follows two others of a similar bent, including one in litigation between BofA and bond insurer MBIA. Indeed, attorneys for MBIA on Monday sent the judge in that case a letter trying to use Judge Rakoff's ruling to bolster their case.

 

For BofA, the recent decisions raise the risk it may ultimately have to increase estimated possible losses for repurchase demands above already established reserves. The bank in securities filings has said that may be the outcome if courts reject its arguments.

 

BofA has also said in filings that if courts more generally follow the sampling approach, this could lead to more litigation from private investors. Of course, more litigation doesn't necessarily result in greater liability. And BofA has already created $19 billion in reserves for mortgage-repurchase demands, while also settling many disputes.

 

Still, it is a reminder that while legal risk has diminished at BofA, it hasn't disappeared.

 

 

[gokou3]

Some fairly decent articles about B of A's legal issues (from Fool.com!):

 

http://www.fool.com/investing/general/2013/02/12/the-single-biggest-threat-to-bank-of-america-today.aspx

http://www.fool.com/investing/general/2013/02/12/b-of-a-bny-mellon-settlement.aspx

http://www.fool.com/investing/general/2013/02/13/dont-overlook-this-multi-billion-dollar-b-of-a-ris.aspx

http://www.fool.com/investing/general/2013/02/13/the-biggest-unknown-threat-to-bank-of-america.aspx

http://www.fool.com/investing/general/2013/02/14/when-will-bank-of-americas-legal-nightmare-end.aspx