BAC-WT - Bank of America Warrants

[xazp]

GS has much, much lower numbers.  GS estimates .09 dividend + $720MM in buybacks.  Just fyi.  I agree with your estimate. 

 

Hi Parsad

where is $7B no. coming from?

Has BAC indicated that the are trying to get approval for $7B from Fed

 

No, that is my number.  They could be asking for more or less, but I think that is around the number they will pay out this year based on their capitalization.  If it was solely based on capitalization, they could pay out twice as much, but they still have some legacy issues, so I think that will weigh into any Fed decision.  As those legacy issues go down, they will pay out more and more.  Cheers!

[Olmsted]

RBC Capital Markets, in a recent report, divided the 18 institutions into four categories for capital distributions, with the most well capitalized banks, KeyCorp (NYSE:KEY) , State Street Corp. (NYSE:STT) , Goldman Sachs (NYSE:GS) , J.P. Morgan Chase (NYSE:JPM)  and BB&T Corp. (NYSE:BBT) , expected to be permitted to make payouts of between 75% to 100% of earnings.

 

In the middle of the pack, Wells Fargo, (NYSE:WFC) , Fifth Third Bancorp (NASDAQ:FITB)  and M&T Bank (NYSE:MTB) , are expected make payouts of between 50% and 75% of earnings.

 

The laggards, including Bank of America (NYSE:BAC) , Citigroup and Capital One Financial (NYSE:COF) , are expected to only make payouts of 10% to 30% of earnings.

 

http://www.marketwatch.com/Story/story/print?guid=7B971CCE-84D0-11E2-9477-002128040CF6

 

How in heck did they figure that BAC is among the least-capitalized?

 

I suppose they must be assuming some kind of holdback for litigation uncertainty.

[wescobrk]

RBC Capital Markets, in a recent report, divided the 18 institutions into four categories for capital distributions, with the most well capitalized banks, KeyCorp (NYSE:KEY) , State Street Corp. (NYSE:STT) , Goldman Sachs (NYSE:GS) , J.P. Morgan Chase (NYSE:JPM)  and BB&T Corp. (NYSE:BBT) , expected to be permitted to make payouts of between 75% to 100% of earnings.

 

In the middle of the pack, Wells Fargo, (NYSE:WFC) , Fifth Third Bancorp (NASDAQ:FITB)   and M&T Bank (NYSE:MTB) , are expected make payouts of between 50% and 75% of earnings.

 

The laggards, including Bank of America (NYSE:BAC) , Citigroup and Capital One Financial (NYSE:COF) , are expected to only make payouts of 10% to 30% of earnings.

 

 

Its reading statements like this that I now expect an even bigger pop after ccar. Everyone has it so wrong. BAC is expected is earn a dollar a share this year or 10 billion so these guys are expecting a 1 billion capital return on the low side and 3 billion on the high? BAC will be a full 100 basis points north of Basel 3 which is 6 years away when they report on April 17th. How can "analysts" that do this full time be so wrong? Sanjeev's number of 7 billion which is more than double their 3 billion on the high side is very reasonable.

[ERICOPOLY]

So if it's a $7b capital return vs a $0 capital return... that's worth a pop in the share price of about 6 cents.

 

That's if you apply a 10% discount rate and you assume that they'll get to return it next year if not this year.

 

So why do investors seem so concerned over the timing?

 

 

 

[xazp]

Because a $7B capital return at $11.50 is ~ $1.4Bn accretive to TBV.  A $7B capital return at $15.50 ends up losing ~$1.4Bn in TBV.  A difference of a year might mean 40% fewer shares repurchased, for example. 

 

IMO there is a limited amount of time to earn "free money" by having the company buy their own stock at a discount to TBV.  Once it starts going to mid-teens and higher, the buybacks will be of limited (or even negative) benefit. 

 

 

So if it's a $7b capital return vs a $0 capital return... that's worth a pop in the share price of about 6 cents.

 

That's if you apply a 10% discount rate and you assume that they'll get to return it next year if not this year.

 

So why do investors seem so concerned over the timing?

[ERICOPOLY]

Because a $7B capital return at $11.50 is ~ $1.4Bn accretive to TBV.  A $7B capital return at $15.50 ends up losing ~$1.4Bn in TBV.  A difference of a year might mean 40% fewer shares repurchased, for example. 

 

IMO there is a limited amount of time to earn "free money" by having the company buy their own stock at a discount to TBV.  Once it starts going to mid-teens and higher, the buybacks will be of limited (or even negative) benefit. 

 

 

So if it's a $7b capital return vs a $0 capital return... that's worth a pop in the share price of about 6 cents.

 

That's if you apply a 10% discount rate and you assume that they'll get to return it next year if not this year.

 

So why do investors seem so concerned over the timing?

 

That adds about 13 cents.  Still not worthy of the major pop people are anticipating if there is a $7b return vs a $0b return.

[hyten1]

also this might seem obvious

 

returning capital early indicates confidence by the management as well as the gov, it indicates returning to normal etc.

[ERICOPOLY]

I understand the psychological arguments, I'm just being a bit like "spock" here in trying to quantify what exactly is so exciting about this timing from the perspective of an owner of a business.

 

[jay21]

Its a shift of expectations I would think.  I.e. if there is a capital return this year, then you can expect an increase in the dividend next year, etc.

 

The overall valuation does not make sense, so why would you think that the reaction to the capital returns to make sense?

[ERICOPOLY]

Well, I see parallels to AIG.  Last year, people believed that that the share price was being held back by the government ownership stake.  I heard that reason given more frequently than ROE.  Today they only have ROE to talk about.  The stock didn't go roaring off into the sunset when the last government share sale was announced.  Instead, it went down.  Today the stock is 15% higher but a lot of financials rallied during that period.

 

So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE.  But I'm happy to be proven wrong.  Having a high ROE not only provides the fuel for higher capital return, it makes the bank far less risky.  Those are logical reasons for the stock to be discounted somewhat, but the capital return issue isn't really all that logical (except in the framework of psychology).

 

[hyten1]

eric i agree

 

at the end of the day its "show me the money" with all investment, what is the return on my investment

 

how much money is bac making

 

hy

[nkp007]

Well, I see parallels to AIG.  Last year, people believed that that the share price was being held back by the government ownership stake.  I heard that reason given more frequently than ROE.  Today they only have ROE to talk about.  The stock didn't go roaring off into the sunset when the last government share sale was announced.  Instead, it went down.  Today the stock is 15% higher but a lot of financials rallied during that period.

 

So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE.  But I'm happy to be proven wrong.  Having a high ROE not only provides the fuel for higher capital return, it makes the bank far less risky.  Those are logical reasons for the stock to be discounted somewhat, but the capital return issue isn't really all that logical (except in the framework of psychology).

 

Just give me my dividend. I don't care about anything else. - Almost every investor

[ERICOPOLY]

Dividends are fine in my RothIRA.

 

But in my taxable account (California), they are massive destruction of shareholder value.  Please don't pay me any dividends!  Buy shares back.

 

[onyx1]

 

But in my taxable account (California), they are massive destruction of shareholder value.  Please don't pay me any dividends!  Buy shares back.

 

I agree.  Best case would be no dividend increase with buyback authority, and the market overreacting to the lack of dividend increase.

[Cardboard]

"So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE."

 

That is absolutely correct Ericopoly and why I have always kept my eye on this subpar $0.99 in earnings. AIG has the same problem, but better management and they will get that fixed pretty quickly. They also understand better the need to get legacy issues out of the way rapidly: sell, cleanup, simplify while they had a much, much larger turnaround to orchestrate than BAC.

 

The only hope for BAC is cost cutting and an improving economy. I see very little imagination at work here. Some like Moynihan, I don't. You put Dimon in there and it would be a lot different. You have to differentiate between a stock that is massively oversold and rebounds to subpar levels of book value and top performance. Many are happy about BAC on this board (including myself), but it is mainly based on when they bought. Meanwhile, they destroyed shareholder value by issuing a large amount of unnecessary convertibles to Buffett at ridiculous prices. Finally, the large capital build up is mostly a result of rebounding asset values, declining loan provisions and retaining all earnings. Any fool could do that.

 

Cardboard

[ERICOPOLY]

The stress test results, however, might help people see how easy it is for the bank to survive getting from point A (now) to point B (2015).

 

I go back to the 2012 Q4 numbers and they made 12% ROTE after backing out the expense cuts that "will" be in place by 2015. 

 

That gives me a baseline $16 share price at 10x earnings multiple.

 

You could assume that the $37 billion or so in pre-tax capital generation between now and then goes entirely to boosting legal reserves (almost double the figure that Mayo estimates), and you still have a $16 stock.

 

So that's about 38% gain in the stock even under these relatively dire legal assumptions.  And that's why I like the stock more than Apple.  12% ROTE is absolutely pathetic relative to their peers, so they have a lot of growth potential in that number.

 

 

 

[Parsad]

"So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE."

 

That is absolutely correct Ericopoly and why I have always kept my eye on this subpar $0.99 in earnings. AIG has the same problem, but better management and they will get that fixed pretty quickly. They also understand better the need to get legacy issues out of the way rapidly: sell, cleanup, simplify while they had a much, much larger turnaround to orchestrate than BAC.

 

The only hope for BAC is cost cutting and an improving economy. I see very little imagination at work here. Some like Moynihan, I don't. You put Dimon in there and it would be a lot different. You have to differentiate between a stock that is massively oversold and rebounds to subpar levels of book value and top performance. Many are happy about BAC on this board (including myself), but it is mainly based on when they bought. Meanwhile, they destroyed shareholder value by issuing a large amount of unnecessary convertibles to Buffett at ridiculous prices. Finally, the large capital build up is mostly a result of rebounding asset values, declining loan provisions and retaining all earnings. Any fool could do that.

 

Cardboard

 

Dimon never inherited Countrywide Financial...and it's a good thing too, because it probably would have taken down JPM.  Moynihan has orchaestrated probably the largest financial turnaround in American history.  He may not have Dimon's abilities, but he saved Bank of America by keeping it simple.  Anyway you want to slice it, BAC is better capitalized than any other large bank, and has put away legacy issues that would have bankrupted many other institutions.  It's leaner, meaner and more efficient.  It will be worth alot more money in 2019, and I bet it is worth more than AIG six years from now. 

 

Have there been mistakes?  Of course.  But don't forget JPM's $6B trading boondoggle or AIG's $300B in bailouts.  These were perilous times, and I have to say all three CEO's did a very good job leading their companies through this mess.  Cheers! 

[wescobrk]

You're correct of course Eric on the 7 billion buyback and it having a small effect on IV, it's more of psychology. Why it went up 25% merely because it passed the stress test last year was bizarre. It probably won't be 25% but mr market will probably overreact as normal on Friday and next Friday. It'll be a good time to reposition the portfolio at that point.

The more important date from a business perspective is 5 weeks when we see progress on LAS.

[Parsad]

I understand the psychological arguments, I'm just being a bit like "spock" here in trying to quantify what exactly is so exciting about this timing from the perspective of an owner of a business.

 

I understand what you are saying Eric.  What I think it is, is if BAC has a substantial return of capital, then that means the valuation of the business should be more in line with "normal" large banks that it competes with...JPM, WFC, USB, etc.  In other words, the bank's position is somewhat restored as the government also believes that the legacy issues no longer create a discount to tangible book, or even to book for that matter.  Cheers!

[CONeal]

"So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE."

 

That is absolutely correct Ericopoly and why I have always kept my eye on this subpar $0.99 in earnings. AIG has the same problem, but better management and they will get that fixed pretty quickly. They also understand better the need to get legacy issues out of the way rapidly: sell, cleanup, simplify while they had a much, much larger turnaround to orchestrate than BAC.

 

The only hope for BAC is cost cutting and an improving economy. I see very little imagination at work here. Some like Moynihan, I don't. You put Dimon in there and it would be a lot different. You have to differentiate between a stock that is massively oversold and rebounds to subpar levels of book value and top performance. Many are happy about BAC on this board (including myself), but it is mainly based on when they bought. Meanwhile, they destroyed shareholder value by issuing a large amount of unnecessary convertibles to Buffett at ridiculous prices. Finally, the large capital build up is mostly a result of rebounding asset values, declining loan provisions and retaining all earnings. Any fool could do that.

 

Cardboard

 

It's leaner, meaner and more efficient.  It will be worth alot more money in 2019, and I bet it is worth more than AIG six years from now. 

 

 

If it gets to your number I'll probably be known as the guy in the neighbood that was caught running down the street naked.  Think alot of shares would be needed to be bought back below TBV to get to that level.  Just going to sit back and enjoy the show.

 

[tng]

 

But in my taxable account (California), they are massive destruction of shareholder value.  Please don't pay me any dividends!  Buy shares back.

 

I agree.  Best case would be no dividend increase with buyback authority, and the market overreacting to the lack of dividend increase.

 

I would prefer buyback too, particularly under tangible book value. But I am almost certain that BAC will increase the dividend just as a show of strength and so the headlines can say "BAC triples dividend!". Confidence is a big part of the banking business, and the idea that BAC is strong will bring/retain future business. I do hope that at least 2/3 of the capital return will be in the form of the a buyback if the share price is under TBV and I think that is very possible.

[xazp]

OK but the easiest path to higher ROE is also a capital return.  The problem is BAC is being forced to hang on to lots of capital for regulatory reasons (either to hit B3 capital levels, or because the regulators forbid them from returning it).  So BAC is roughly at ~9.5% in B3 capital against a requirement of 8.5%.  If they are not allowed to return any capital, they'll be at (say) 11% in a year. 

 

11% vs 8.5% means they are holding on to 30% too much capital.  So ROC with an 8.5% ratio is going to be 30% below ROC with an 11% ratio.  Other metrics (ROE, ROTE, ROA) will also be depressed.  Basically when they return unneeded capital/equity, it boosts all the metrics you are interested in - quite possibly in a substantial manner. 

 

Also, when the feel determined to invest excess capital rather than return it, that's when big mistakes are made (dumb acquisitions, dumb loans, dumb ...).  The dumb mistakes that periodically happen in the banking industry are the reasons this is a turnaround play for me, and not a longer term hold.  (this is also why I'd like to see capital returns sooner rather than later, so the market will perceive the turnaround). 

 

 

 

Well, I see parallels to AIG.  Last year, people believed that that the share price was being held back by the government ownership stake.  I heard that reason given more frequently than ROE.  Today they only have ROE to talk about.  The stock didn't go roaring off into the sunset when the last government share sale was announced.  Instead, it went down.  Today the stock is 15% higher but a lot of financials rallied during that period.

 

So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE.  But I'm happy to be proven wrong.  Having a high ROE not only provides the fuel for higher capital return, it makes the bank far less risky.  Those are logical reasons for the stock to be discounted somewhat, but the capital return issue isn't really all that logical (except in the framework of psychology).

[ERICOPOLY]

OK but the easiest path to higher ROE is also a capital return.  The problem is BAC is being forced to hang on to lots of capital for regulatory reasons (either to hit B3 capital levels, or because the regulators forbid them from returning it).  So BAC is roughly at ~9.5% in B3 capital against a requirement of 8.5%.  If they are not allowed to return any capital, they'll be at (say) 11% in a year. 

 

11% vs 8.5% means they are holding on to 30% too much capital.  So ROC with an 8.5% ratio is going to be 30% below ROC with an 11% ratio.  Other metrics (ROE, ROTE, ROA) will also be depressed.  Basically when they return unneeded capital/equity, it boosts all the metrics you are interested in - quite possibly in a substantial manner. 

 

Also, when the feel determined to invest excess capital rather than return it, that's when big mistakes are made (dumb acquisitions, dumb loans, dumb ...).  The dumb mistakes that periodically happen in the banking industry are the reasons this is a turnaround play for me, and not a longer term hold.  (this is also why I'd like to see capital returns sooner rather than later, so the market will perceive the turnaround). 

 

 

 

Well, I see parallels to AIG.  Last year, people believed that that the share price was being held back by the government ownership stake.  I heard that reason given more frequently than ROE.  Today they only have ROE to talk about.  The stock didn't go roaring off into the sunset when the last government share sale was announced.  Instead, it went down.  Today the stock is 15% higher but a lot of financials rallied during that period.

 

So I believe with BAC the real problem with the stock isn't the capital return, it's the ROE.  But I'm happy to be proven wrong.  Having a high ROE not only provides the fuel for higher capital return, it makes the bank far less risky.  Those are logical reasons for the stock to be discounted somewhat, but the capital return issue isn't really all that logical (except in the framework of psychology).

 

All true except it will only depress ROE over the period of time until their earnings power is up to snuff.  Beyond that point they operate at 9% B3 after flushing out their excess capital cushion.

 

So whether you get the capital as it comes in (quarterly starting right now), or whether you have to discount it for a year or two... either way it's all coming back to us.  The difference in intrinsic value should only be the discounted value of that capital return whether it be today or in a year or two.

 

There is no argument being made that any excess capital cushion will be permanent -- the management is only guiding that capital return will remain depressed until earnings are regular and recurring (in other words, when the expenses are run off).

 

A bathtub has a water level, and the volume of water in the tub is the capital cushion.  The water level will drop if the rate out exceeds the rate in.  I figure that's why you would want a relatively higher water level.  But when the rate in doubles from current levels, a lower water level would be needed.

 

 

 

[wescobrk]

Citi, like other large banks, is currently awaiting a verdict from the Federal Reserve over whether it can return more capital. Last year, regulators struck down Citi's overzealous requests, an embarrassment for the bank and then-chief Vikram Pandit.

 

Analysts at KBW expect the bank to return virtually nothing to shareholders via dividends and buybacks. Corbat said this year, there's "no room for error."

 

I don't follow Citi that closely but thought this was interesting. C is currently trading 8 billion higher than BAC I incidentally.

[mankap]

We may not know about the capital return plan that is approved by Fed today.

According to WSJ , Fed will publicly release the stress test results in two parts.

Although the banks will be told in private today if there dividend and buyback plan is approved .If it is not approved they have 48 hrs to resubmit the plan.

 

The first component of the release, data on how banks will fare in an economic downturn, is slated for after U.S. stock markets close on Thursday. The second part, the Fed's response to buyback-and-dividend requests, is scheduled for publication a week later.

http://online.wsj.com/article/SB10001424127887324539404578342320864364856.html?mod=WSJ_hp_LEFTWhatsNewsCollection