BAC-WT - Bank of America Warrants

[Kraven]

When I read some of the comments on threads like this I think I must be thinking about things in a different way.  I don't understand all the talk about whether BAC is great or is better, the same or worse than JPM, C, WFC, etc.  What difference does it make?  I think that a little sense of history is missing.  All of these banks have only been in their current forms for a relatively short time, so to say BAC has never been great or JPM has always been great is to really say that for about the past decade or so this has been true.  In their most recent forms, prior to the financial crisis BAC was thought of just fine.  It's really only Countrywide that has truly tarnished their image.

 

When I think about whether BAC is a good investment, it doesn't matter to me what JPM, WFC, et al are doing.  On a normalized basis BAC is already earning close to $2 a share and that gives no credit for huge DTAs which can shelter earnings.  I think that BAC's performance is certainly muted now, but right or wrong (and at this point it doesn't matter) they are dealing with the hand they were dealt.  Expenses are very high due to all their issues, litigation and otherwise, but that won't always be the case.  Things will work themselves out at some point one way or the other.

 

So it doesn't really matter to me whether BAC will grow revenues and become great.  It doesn't take much imagination to see them at least worth BV.  Once that occurs, then it might be worth wondering about their future.  I also don't care really about crown jewels and the like.  Banking is a commodity business.  Money is fungible.  At the end of the day, if people can get their money for 1 bp less than the guy next door, they will take it.  No one loves their bank anymore.  There is no loyalty.  At this point, all I care about is a reversion to the mean and I fully expect that that will occur over the next couple of years or so.  If not, so be it.

 

That nicely summarizes my feelings.  While I appreciate Cardboard's sentiments, and he always puts out good arguments, I disagree.  I am only seeking a return to value, or reversion of the mean at this point in time which to me is $20 per share, thereabouts.  Unless BAC does nothing right before Jabuary 2015 that is not an unreasonable target. 

 

Same as AIG.  Return to value is my only target.  I can reassess every day between now and then.

 

At that point I will reassess the long term

 

I would add.  Given that money is fungible, to me the difference between brilliance and mediocrity in the valuation of banks is maybe the difference between 1-1.25x BV and 1.5x BV.  So to me, I would never value a bank at more than 1.5x BV, I don't care how well they are doing.  I don't believe it's sustainable.  I realize that in the past banks have traded at higher multiples, but I would never be part of that game.  So when I think about whether BAC is a good investment now and see it's trading at around half BV, while WFC which almost certainly is a "better" bank is trading at 1.3x BV, it's clear to me which is the better investment.  It's not about which institution is of higher quality, it's about which will provide better returns looking at it right this second.  BAC will likely resolve it's issues and trade up to at least the "standard" level of mediocrity, say 1x BV.  Then again, maybe it won't.

[bennycx]

There is a reason why Buffett keeps buying Wells. Their cost of funding is so much lower than the other banks so they pretty much can earn higher margins than the other banks if they want. Furthermore their culture is such that this should continue for a long time.

 

The reason why other banks still do well is because they keep extending more risky loans at higher interest rates so even if their cost of funding is high, their NIM is still comparable... and they keep doing that until one day they blow up esp with leverage. Wells doesn't play this game so they will keep growing even faster whenever there is another banking blowup. Wells could extend loans at crazy rates like 5+% and earn 5% NIM, but they don't, while other banks extend them at 5% just to get 3+% NIM.

 

The only play for the weaker banks is "reversion to mean", but Wells really deserves a much higher multiple than the rest.

[ERICOPOLY]

There is a reason why Buffett keeps buying Wells. Their cost of funding is so much lower than the other banks so they pretty much can earn higher margins than the other banks if they want. Furthermore their culture is such that this should continue for a long time.

 

The reason why other banks still do well is because they keep extending more risky loans at higher interest rates so even if their cost of funding is high, their NIM is still comparable... and they keep doing that until one day they blow up esp with leverage. Wells doesn't play this game so they will keep growing even faster whenever there is another banking blowup. Wells could extend loans at crazy rates like 5+% and earn 5% NIM, but they don't, while other banks extend them at 5% just to get 3+% NIM.

 

The only play for the weaker banks is "reversion to mean", but Wells really deserves a much higher multiple than the rest.

 

I believe they also are a safer bank due to the heavy reliance on fee income as a high percentage of total income.

 

Should they ever find themselves in an especially nasty recession where loan loss reserve building is depleting capital, they can rebuild that capital quickly without dilution because the fee income accounts for 1/2 of their total income, and the fee income keeps rolling in during recessions without any associated rising reserve costs (there's no reserving associated with fee income to state the obvious).

 

Being able to quickly dig their way out of trouble -- that makes it far less risky.  Heavy reliance on fee income is key because it's this extra stream income that doesn't come with the headache of loan loss reserving when things go bad.  The fees keep rolling in.

 

Now, were you to take away their fee income and force them to make their numbers strictly from net interest margin, the level of risk would be substantially higher.

 

 

 

[Liberty]

There is a reason why Buffett keeps buying Wells. Their cost of funding is so much lower than the other banks so they pretty much can earn higher margins than the other banks if they want. Furthermore their culture is such that this should continue for a long time.

 

The reason why other banks still do well is because they keep extending more risky loans at higher interest rates so even if their cost of funding is high, their NIM is still comparable... and they keep doing that until one day they blow up esp with leverage. Wells doesn't play this game so they will keep growing even faster whenever there is another banking blowup. Wells could extend loans at crazy rates like 5+% and earn 5% NIM, but they don't, while other banks extend them at 5% just to get 3+% NIM.

 

The only play for the weaker banks is "reversion to mean", but Wells really deserves a much higher multiple than the rest.

 

I think Buffett is right that Wells is a better permanent holding. But that doesn't mean that within the next few years BAC won't make more money for shareholders. Buffett did get tons of BAC warrants, after all...

[Kraven]

There is a reason why Buffett keeps buying Wells. Their cost of funding is so much lower than the other banks so they pretty much can earn higher margins than the other banks if they want. Furthermore their culture is such that this should continue for a long time.

 

The reason why other banks still do well is because they keep extending more risky loans at higher interest rates so even if their cost of funding is high, their NIM is still comparable... and they keep doing that until one day they blow up esp with leverage. Wells doesn't play this game so they will keep growing even faster whenever there is another banking blowup. Wells could extend loans at crazy rates like 5+% and earn 5% NIM, but they don't, while other banks extend them at 5% just to get 3+% NIM.

 

The only play for the weaker banks is "reversion to mean", but Wells really deserves a much higher multiple than the rest.

 

I am not sure I could disagree with this post more.  You are attributing characteristics to Wells that just aren't warranted.  I have no idea what crazy rates you are referring to that the other banks are doing.  Wells's loans have a higher average rate than BAC's do.  In terms of funding costs, it's not currently an apples to apples comparison.  There are different models at work here.  It doesn't matter whether it should have been that way or could have been another way.  It is now.  BAC is stuck with Countrwide and has ML.  Wells doesn't have that.  Even so, BAC's interest bearing liabilities are only 47 bp higher than WFC's and BAC has more non-interest bearing funding.  Don't confuse all in funding cost either from an efficiency ratio standpoint.  As mentioned above with the different models, BAC has much larger fish to fry than WFC and it's costing a lot of money.  When the dust settles in a few years it will consistent enough.

 

Always remember that money is fungible.  There is no loyalty to one bank over another.  A mortgage from BAC tastes just as sweet from one at WFC and a fund guy looking for funding for a deal couldn't give a crap where their money comes from as long as it's cheap, the service is halfway decent and the sales girls are good looking.

 

I do agree however that WFC deserves a higher multiple based on what they are doing today, but on a normalized basis it won't make too much of a difference and there will be far higher returns in reversion to the mean that compounding with an already good performing bank.

 

Finally, the culture point always irritates me.  It's fluff.  It's a soundbite that plays well in analyst pitches that show up on CNBC or when giving an interview.  It's a non-issue.  I've never truly believed that across hundreds of thousands of employees there's a true culture.  Management might have one, but Moynihan is a fair and square guy.  Nothing fancy, but he's certainly not of the same culture as Lewis was and so in that respect things have changed.

[Cardboard]

I think the problem here is that many of you don't like making money. I am serious!

 

For example, ask Ericopoly how many times in his investment career he has made a dime with share buybacks?

 

I have made money with that incremental stuff only twice and that is because these 2 companies bought back 25% of their shares at low prices in a period of 6 months. So what do you think is going to be the impact of buying back $5 billion worth of shares in a year time on a $125 billion market cap or 4% when the manager is issuing them as fast as he can to himself and employees?

 

Regarding cost cutting, you guys are wildly optimistic. Every company that I have seen going down that route has always disappointed. I have never seen a restructuring plan yielding the results that were originally promised. Like I said in my previous post, these static targets do not factor in changes that will occur. Dimon has talked about one of them: cybercrime. Ask Moynihan if it is part of his projections? Something else positive has to happen to offset the unforeseen. Now, these are large and should yield some results, but the way you add it all up will not work out by 2015. If we were ahead and pushing the bar higher, maybe yes, but not the way it is going.

 

Another problem that people ignore is the tone of a CEO. How do you think that regulators feel when they go audit JPM's numbers? Don't you think that they feel a little more in charge when they visit BAC? The end result is that we are being negatively penalized for no reason on a capital return standpoint. BAC should have been allowed to buyback $15 billion worth of shares in its latest request. But to get that, you have to be forceful and tell these know little regulators to do their audit thing and then to head back home. You have to show them that you know more than they do, which should be the case, and to tell them when enough is enough. Moynihan is a beggar.

 

So while some have dismissed the importance of comparing with others, in what they call on top of it a commoditized business, I think it is crucial to shareholder returns. P/E's, ROE's, ROA's, capital level are all tied together in what the business will be priced at. And until we can surprise un-invested investors in BAC to the upside then what is going to push them to invest and make your share price go up? To get surprises, you need a pushy manager especially in an organization that is bloated and has only grown or delivered results in the past by pilling acquisitions.

 

So I think what we have here is a sense of complacency hence my initial comment on not liking making money. Your share price has about doubled, congratulations! Now what is next is the question you should ask yourself and how likely it is to happen? Is that one of the best investments that I have available out there? I thought it was until Moynihan screwed up once again with the capital return plan. Now he has done it again not being able to even deliver $0.25 a share in the first quarter which for many banks is one of the better one. MBIA is not even a factor, but it just shows a lack of judgement in terms of risk and dragging forever old issues.

 

I did lighten up over the last few weeks. Call me lucky. Just wish I had gone further and sold covered calls on my remaining position.

 

Cardboard

[xazp]

BAC's BV exceeds TBV by about $7/share or nearly $80 billion.  This is because Ken Lewis build BAC by over-priced acquisitions.  The "intangible" assets are comprised of BAC consistently paying well over book value for those acquisitions.  I don't think their intangible assets earn anything, or ever will.  Whatever value the Fleet brand once had ... I'm dubious it's adding much to earnings today.    Just because you got into a bidding war and over-paid for an acquisition, that doesn't make the acquisition magically more profitable.  To me, reliance on BAC's BV in particular is a mistake.

 

Dealbook has a good article on Moynihan's incentive comp. 

http://dealbook.nytimes.com/2013/04/17/for-bank-of-america-c-e-o-greed-would-be-a-good-thing/

 

The targets to get his MAX bonus are:  ROA of .8 by 2015; increase in TBV by 8.5%/year. 

He gets his MIN bonus (still pretty good) with an ROA of .6 by 2015; and increase in TBV by 5%/year. 

 

These are ridiculously low targets.  He gets a bonus for having the worst ratios of his peers??  At any rate, the earnings that many of you suggest for 2015 is well above the numbers implied by his bonus structure. 

 

 

I would add.  Given that money is fungible, to me the difference between brilliance and mediocrity in the valuation of banks is maybe the difference between 1-1.25x BV and 1.5x BV.  So to me, I would never value a bank at more than 1.5x BV, I don't care how well they are doing.  I don't believe it's sustainable.  I realize that in the past banks have traded at higher multiples, but I would never be part of that game.  So when I think about whether BAC is a good investment now and see it's trading at around half BV, while WFC which almost certainly is a "better" bank is trading at 1.3x BV, it's clear to me which is the better investment.  It's not about which institution is of higher quality, it's about which will provide better returns looking at it right this second.  BAC will likely resolve it's issues and trade up to at least the "standard" level of mediocrity, say 1x BV.  Then again, maybe it won't.

[stahleyp]

cardboard, if you don't mind sharing. what % were you in BAC previously? What % now? Thanks in advance!

[ourkid8]

Don't forget the fact they are also redeeming $5.5B in high yielding (8%+) Preferred stock.  This would yield under $500 million in interest savings.  Together with the $5B in share repurchases, they are returning about 8.5% of marketcap which is quite substantial.  I do agree with you that I was annoyed at how much stock is being issued...

 

S

 

 

I have made money with that incremental stuff only twice and that is because these 2 companies bought back 25% of their shares at low prices in a period of 6 months. So what do you think is going to be the impact of buying back $5 billion worth of shares in a year time on a $125 billion market cap or 4% when the manager is issuing them as fast as he can to himself and employees?

[xazp]

I guess I'm somewhere between you guys (probably going to draw fire from everyone). 

 

I don't think the cost cut targets are wildly optimistic, and this is because, the cost cuts are coming (mainly) from areas that are non-revenue producing. 

 

So: when BAC eventually settles most of their lawsuits, they don't have to pay $1Bn/quarter to external lawyers.  This is cost-cutting, but it won't impact their revenues at all.  In fact,  profitability will increase as they stop adding to litigation reserves. 

 

When BAC works through their foreclosure pipeline, which they are, they don't have to pay $3Bn/quarter to lawyers, real estate agents, foreclosure agents, maintenance people, etc - to service those foreclosures.  Again, these are not revenue producing people.  Rather, the absence of these sorts of workers implies higher profitability because foreclosures are a money-losing endeavor.  (This is a point often missed: it's not just the drop in expenses, but a return to a portfolio of paying mortgages also implies higher revenues). 

 

Ken Lewis acquired a lot of companies, but rarely did the hard work of integrating them.  There are lots of redundant tech systems and probably staffing.  So, there is a bunch of work to integrate tech systems, and there are redundant positions, but it makes sense to combine these into the one organization.  When the tech integration is done, they don't need to spend as much on tech; and there are some redundant positions that probably need to go.  So there's another set of expenses. 

 

I guess my point is, I don't see this as regular cost cutting, but rather ones that A) are revenue neutral; or B) the post-integration activities that normally happen (but didn't under Lewis). 

 

 

 

 

 

 

 

Regarding cost cutting, you guys are wildly optimistic. Every company that I have seen going down that route has always disappointed. I have never seen a restructuring plan yielding the results that were originally promised. Like I said in my previous post, these static targets do not factor in changes that will occur. Dimon has talked about one of them: cybercrime. Ask Moynihan if it is part of his projections? Something else positive has to happen to offset the unforeseen. Now, these are large and should yield some results, but the way you add it all up will not work out by 2015. If we were ahead and pushing the bar higher, maybe yes, but not the way it is going.

 

Cardboard

[Cardboard]

It was about 27% of the portfolio and with the notional value in the warrants a lot more. Now down to 16% and only into the stock which is still way too much based on what I see.

 

Regarding the importance of culture Kraven, especially in banking, you are very wrong. Culture is everything for these large organizations. I don't know the specific of BAC, but I have worked for a multi-national and every quarter/year you are being evaluated on your progress vs a plan that your boss setup for you based on a plan that was setup for him and so on and so forth. There is usually a multi-year plan or vision combined with a more actionable yearly plan. You also have base goals and stretch goals within these plans.

 

The targets and direction being setup from the top drive everything: results, incentives, promotions. From what I have seen, humans don't like change and prefer the status quo, the little routine. If you want them to do more, you have to demand more. You will also notice that stretch goals are rarely if ever attained, hence the importance from the top to be demanding, realistic, but demanding.

 

So when you read about what Xazp just posted, then you realize that if the top is not being pushed hard, then it is very likely that it trickles all the way down the organization and that goals being published now will not be met and some excuses will be used to explain them.

 

Cardboard

[bennycx]

I do not disagree with you on BAC. I was referring more to banks like Citi. BAC also has a good model in terms of cost of funding, and don't forget Buffett also invested in BAC. Me too.

 

But with BAC the problem is it is very very difficult to look through and see what will happen and how long it takes to solve all the issues. The other thing is the issue of culture, which really is very important. History has shown that Wells should continue as it is, but we are not sure what Moynihan would do. Maybe he would be good at capital allocation and drive ROE, I don't really know.

 

Furthermore money is fungible in theory, but in practice deposits are really sticky. It is too troublesome for someone to change banks. Wells makes this more and more sticky by doing cross selling, so the liabilities are always locked up for them to loan out more again. Again this is the certainty uncertainty thing. With Wells I am fairly certain so I am willing to buy with less of a safety margin. With BAC, I'm not so sure, maybe need more drop in price.

 

There is a reason why Buffett keeps buying Wells. Their cost of funding is so much lower than the other banks so they pretty much can earn higher margins than the other banks if they want. Furthermore their culture is such that this should continue for a long time.

 

The reason why other banks still do well is because they keep extending more risky loans at higher interest rates so even if their cost of funding is high, their NIM is still comparable... and they keep doing that until one day they blow up esp with leverage. Wells doesn't play this game so they will keep growing even faster whenever there is another banking blowup. Wells could extend loans at crazy rates like 5+% and earn 5% NIM, but they don't, while other banks extend them at 5% just to get 3+% NIM.

 

The only play for the weaker banks is "reversion to mean", but Wells really deserves a much higher multiple than the rest.

 

I am not sure I could disagree with this post more.  You are attributing characteristics to Wells that just aren't warranted.  I have no idea what crazy rates you are referring to that the other banks are doing.  Wells's loans have a higher average rate than BAC's do.  In terms of funding costs, it's not currently an apples to apples comparison.  There are different models at work here.  It doesn't matter whether it should have been that way or could have been another way.  It is now.  BAC is stuck with Countrwide and has ML.  Wells doesn't have that.  Even so, BAC's interest bearing liabilities are only 47 bp higher than WFC's and BAC has more non-interest bearing funding.  Don't confuse all in funding cost either from an efficiency ratio standpoint.  As mentioned above with the different models, BAC has much larger fish to fry than WFC and it's costing a lot of money.  When the dust settles in a few years it will consistent enough.

 

Always remember that money is fungible.  There is no loyalty to one bank over another.  A mortgage from BAC tastes just as sweet from one at WFC and a fund guy looking for funding for a deal couldn't give a crap where their money comes from as long as it's cheap, the service is halfway decent and the sales girls are good looking.

 

I do agree however that WFC deserves a higher multiple based on what they are doing today, but on a normalized basis it won't make too much of a difference and there will be far higher returns in reversion to the mean that compounding with an already good performing bank.

 

Finally, the culture point always irritates me.  It's fluff.  It's a soundbite that plays well in analyst pitches that show up on CNBC or when giving an interview.  It's a non-issue.  I've never truly believed that across hundreds of thousands of employees there's a true culture.  Management might have one, but Moynihan is a fair and square guy.  Nothing fancy, but he's certainly not of the same culture as Lewis was and so in that respect things have changed.

[cubsfan]

I want to comment here that the last 20 or 25 posts are great.

I continue to be so impressed by the talent assembled on this particular BAC thread.

 

And, it is refreshing to see this difference of opinion on BAC and it's an

incredibly useful dialog on the real progress being made by management.

[wescobrk]

Don't forget the fact they are also redeeming $5.5B in high yielding (8%+) Preferred stock.  This would yield under $500 million in interest savings.  Together with the $5B in share repurchases, they are returning about 8.5% of marketcap which is quite substantial.   I do agree with you that I was annoyed at how much stock is being issued...

 

S

 

Quote from: Cardboard on Today at 08:06:18 AM

 

I have made money with that incremental stuff only twice and that is because these 2 companies bought back 25% of their shares at low prices in a period of 6 months. So what do you think is going to be the impact of buying back $5 billion worth of shares in a year time on a $125 billion market cap or 4% when the manager is issuing them as fast as he can to himself and employees?"

 

I'm a little annoyed that 2.5 weeks into q2 and Moynihan apparently hasn't bought any stock yet. The press release reads that it is expected that share buybacks will commence. Based on that verbiage he went 2.5 weeks without buying any shares. He should be able to buy the full 5 billion in about a month. I would be very annoyed if 3 months from now he still has a few billion to buyback.

 

Also, can't BAC apply for more buybacks in September? Basel 3 is already 92 basis points above the requirement in 2019 and in 6 months it'll probably be about 110-120 basis points above.

 

Next quarter they should report about th same as Citi did (3.8) billion yet Citi has a market cap more than 10% than BAC and Citi can't really buy back any stock. If nothing else, BAC looks undervalued relative to C. C is positioned for global growth but we may not have much global growth for the next year or two meanwhile we could easily grow 2% in US the next 2 years like we have done the past 3 years which means BAC should continue to slowly improve.

 

 

[wescobrk]

I meant Citi reported 3.8 billion and q2 expected to begin stock buybacks. Typing on iPhone is challenging.

 

[Kraven]

BAC's BV exceeds TBV by about $7/share or nearly $80 billion.  This is because Ken Lewis build BAC by over-priced acquisitions.  The "intangible" assets are comprised of BAC consistently paying well over book value for those acquisitions.  I don't think their intangible assets earn anything, or ever will.  Whatever value the Fleet brand once had ... I'm dubious it's adding much to earnings today.    Just because you got into a bidding war and over-paid for an acquisition, that doesn't make the acquisition magically more profitable.  To me, reliance on BAC's BV in particular is a mistake.

 

Dealbook has a good article on Moynihan's incentive comp. 

http://dealbook.nytimes.com/2013/04/17/for-bank-of-america-c-e-o-greed-would-be-a-good-thing/

 

The targets to get his MAX bonus are:  ROA of .8 by 2015; increase in TBV by 8.5%/year. 

He gets his MIN bonus (still pretty good) with an ROA of .6 by 2015; and increase in TBV by 5%/year. 

 

These are ridiculously low targets.  He gets a bonus for having the worst ratios of his peers??  At any rate, the earnings that many of you suggest for 2015 is well above the numbers implied by his bonus structure. 

 

 

I would add.  Given that money is fungible, to me the difference between brilliance and mediocrity in the valuation of banks is maybe the difference between 1-1.25x BV and 1.5x BV.  So to me, I would never value a bank at more than 1.5x BV, I don't care how well they are doing.  I don't believe it's sustainable.  I realize that in the past banks have traded at higher multiples, but I would never be part of that game.  So when I think about whether BAC is a good investment now and see it's trading at around half BV, while WFC which almost certainly is a "better" bank is trading at 1.3x BV, it's clear to me which is the better investment.  It's not about which institution is of higher quality, it's about which will provide better returns looking at it right this second.  BAC will likely resolve it's issues and trade up to at least the "standard" level of mediocrity, say 1x BV.  Then again, maybe it won't.

 

Fair enough re BV vs TBV.  Typically I don't pay any attention to a bank's BV, but will sometimes make an exception with the larger banks where it's tougher to pin things down.  I do think in any case, that BAC's BV is a good proxy for what the bank is worth and what earning power will support.

[Kraven]

Regarding the importance of culture Kraven, especially in banking, you are very wrong. Culture is everything for these large organizations. I don't know the specific of BAC, but I have worked for a multi-national and every quarter/year you are being evaluated on your progress vs a plan that your boss setup for you based on a plan that was setup for him and so on and so forth. There is usually a multi-year plan or vision combined with a more actionable yearly plan. You also have base goals and stretch goals within these plans.

 

I don't disagree that culture is important generally, but I don't think in this context it is.  There is only so much a bank can do to make money.  At the end of the day they all do the same things perhaps in ways that differ only around the margins.  I think there can be differences in perception of what the culture might be at any one institution, but when you drill down not much is really different.  Just my view.

[ourkid8]

I believe the CCAR stress tests and Capital Planning is a yearly process:

 

http://www.federalreserve.gov/bankinforeg/stress-tests-capital-planning.htm

 

" CCAR is an annual exercise by the Federal Reserve to ensure that the largest bank holding companies have sufficient capital to continue operations throughout times of economic and financial stress and robust, forward-looking capital planning processes that account for their unique risks.  As part of the CCAR, the Federal Reserve evaluates institutions' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases."

 

Also, can't BAC apply for more buybacks in September?

[Liberty]

I don't have special insights into the culture of WFC or BAC, but I try to keep the Halo Effect in mind (http://www.cornerofberkshireandfairfax.ca/forum/books/the-halo-effect-phil-rosenzweig/).

 

How does the halo effect manifest itself in the business world? Imagine a company that is doing well, with rising sales, high profits, and a sharply increasing stock price. The tendency is to infer that the company has a sound strategy, a visionary leader, motivated employees, an excellent customer orientation, a vibrant culture, and so on. But when that same company suffers a decline—if sales fall and profits shrink—many people are quick to conclude that the company’s strategy went wrong, its people became complacent, it neglected its customers, its culture became stodgy, and more. In fact, these things may not have changed much, if at all. Rather, company performance, good or bad, creates an overall impression—a halo—that shapes how we perceive its strategy, leaders, employees, culture, and other elements.

 

The fact is that many everyday concepts in business—including leadership, corporate culture, core competencies, and customer orientation—are ambiguous and difficult to define. We often infer perceptions of them from something else, which appears to be more concrete and tangible: namely, financial performance. As a result, many of the things that we commonly believe are contributions to company performance are in fact attributions. In other words, outcomes can be mistaken for inputs.

 

Is WFC succeeding because it has a great culture and strategy, or is it being described that way because it is succeeding? If it was to stumble, wouldn't people be able to find all kinds of bad things to say about them that would also ring true? Vice versa for BAC. I don't know.

[wescobrk]

If that is the case their Basel 3 will be ridiculous by march 2014. Probably 150 basis points above the requirement for 2019.

 

Basically a hefty dividend check is probably in the mail in q2 of 2014 so income investors will wait to buy for a long time.

[Parsad]

If that is the case their Basel 3 will be ridiculous by march 2014. Probably 150 basis points above the requirement for 2019.

 

Basically a hefty dividend check is probably in the mail in q2 of 2014 so income investors will wait to buy for a long time.

 

You are probably correct.  With no dividend, the preferreds buyback and share buyback under tangible book, Tier 1 Equity under Basel 3 will easily get to 10% by the end of the year.  They only need 8.5%!  I think you are going to see the big dividend in 2014, since buybacks won't be quite as attractive above tangible book (yes, I think it will be over TB this year) and the preferreds will already have been redeemed.  I suspect large increase in dividends, buyback of Buffett's preferreds and a smaller share buyback next year.  Cheers!

[wescobrk]

I agree dimon said he didn't find buying stock aggressively above tbv makes sense either.

I think 48 cents annual dividend next year .3 of 1.60 roughly earnings power) and they could still easily buyback buffet's 5.5 billion roughly (I think there is a 10% buyback premium) and maybe 5 billion stock buyback.

 

That gives a little above 4% dividend yield at today's stock price.

 

Maybe 60-70cents dividend in 2015.

[xazp]

I think culture is important.  Look at the stock prices of WFC and BAC from 2004 to present.  I'd describe BAC as being "growth" investors - they grew through acquisition which made them the largest bank in the U.S.  Acquisitions are smart in a generally growing economy, and for a while they were the king.  I'd describe WFC as a "value" investor - they pulled back during the bubble, then acquired during the crash, and grew because BAC had to pull back. 

 

I think during "good times" you want to own BAC, and during "bad times" you want to own WFC.  I just happen to think the economy is good enough and housing recovering enough that it's a good time to own BAC. 

 

 

Regarding the importance of culture Kraven, especially in banking, you are very wrong. Culture is everything for these large organizations. I don't know the specific of BAC, but I have worked for a multi-national and every quarter/year you are being evaluated on your progress vs a plan that your boss setup for you based on a plan that was setup for him and so on and so forth. There is usually a multi-year plan or vision combined with a more actionable yearly plan. You also have base goals and stretch goals within these plans.

 

I don't disagree that culture is important generally, but I don't think in this context it is.  There is only so much a bank can do to make money.  At the end of the day they all do the same things perhaps in ways that differ only around the margins.  I think there can be differences in perception of what the culture might be at any one institution, but when you drill down not much is really different.  Just my view.

[treasurehunt]

I agree dimon said he didn't find buying stock aggressively above tbv makes sense either.

 

I don't understand this obsession with TBV when it comes to buybacks except to the degree that TBV is an understated proxy for intrinsic value. BTW, Dimon said that it is a no-brainer to buy back JPM stock below TBV; he did not say that it doesn't make sense to buy stock above TBV. After all they bought back 2.6 billion or so worth of stock above TBV in the first quarter.

 

I think BAC is conservatively worth in the high teens per share, so I'll be happy with repurchases at even $15 per share.

[wescobrk]

Note my statement above I said aggreesively not that he didn't want to buy at all. He reduced buyback from 15 billion to 6 billion this year.

6 billion on 180 market cap isnt doing much except offsetting dilution and maybe 1 percent more, if that.