BAC-WT - Bank of America Warrants

[PlanMaestro]

Bank of America's share price is equal to tangible book value per share for the first time in about 2 years.

 

http://on.ft.com/10SkNDY

[PlanMaestro]

Bank of America $8.5 billion settlement heads for court showdown.

 

http://www.reuters.com/article/2013/06/03/us-bankofamerica-mbs-idUSBRE9520BX20130603

[PlanMaestro]

It's (finally) time for objectors to BofA's MBS deal to make their case

http://www.readability.com/articles/zmk4rktb

 

 

RT @AlisonFrankel At $BAC put-back hearing, Kathy Patrick says OCC cleared BAC to put Countrywide in bankruptcy to protect Bank of America

[blainehodder]

Someone just got punished market selling the 2015 12ers into a stink bid.  Any of you arb that market order?  Do these trades get busted somehow?  Maybe not a bad idea to just put some stinkers in on illiquid securities with the hope of one day getting filled.  Free lotto ticket?

[PlanMaestro]

BofA executives hostile in mortgage talks.

http://www.ft.com/intl/cms/s/0/720ace60-cece-11e2-ae25-00144feab7de.html#axzz2VT0i2bKf

[meiroy]

It's (finally) time for objectors to BofA's MBS deal to make their case

http://www.readability.com/articles/zmk4rktb

 

 

RT @AlisonFrankel At $BAC put-back hearing, Kathy Patrick says OCC cleared BAC to put Countrywide in bankruptcy to protect Bank of America

 

http://finance.yahoo.com/news/bofa-could-still-put-countrywide-225220910.html

 

""I never bluffed during the course of this negotiation," Laughlin said.

However, he denied that he or anyone else at Bank of America had discussed a Countrywide bankruptcy with the bank's regulator, the Office of the Comptroller of the Currency.

"What I said was that, in my opinion, I would not see the regulators being any impediment to bankrupting Countrywide."

That appeared to be slightly at odds with the opening statement last week of Kathy Patrick of Gibbs & Bruns, a lawyer for the institutional investors who said witnesses would testify that Laughlin told investors the bank received clearance from the OCC to put Countrywide into bankruptcy."

 

[Grenville]

It's (finally) time for objectors to BofA's MBS deal to make their case

http://www.readability.com/articles/zmk4rktb

 

 

RT @AlisonFrankel At $BAC put-back hearing, Kathy Patrick says OCC cleared BAC to put Countrywide in bankruptcy to protect Bank of America

 

http://finance.yahoo.com/news/bofa-could-still-put-countrywide-225220910.html

 

""I never bluffed during the course of this negotiation," Laughlin said.

However, he denied that he or anyone else at Bank of America had discussed a Countrywide bankruptcy with the bank's regulator, the Office of the Comptroller of the Currency.

"What I said was that, in my opinion, I would not see the regulators being any impediment to bankrupting Countrywide."

That appeared to be slightly at odds with the opening statement last week of Kathy Patrick of Gibbs & Bruns, a lawyer for the institutional investors who said witnesses would testify that Laughlin told investors the bank received clearance from the OCC to put Countrywide into bankruptcy."

 

Thanks for posting. I'm not happy about them changing their story regarding a Countrywide bankruptcy. Seems odd that during a trial they don't have their story straight.

[PlanMaestro]

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=79882&terms=@ReutersTopicCodes+CONTAINS+%27ANV%27

[mankap]

Bruce is presenting at the Morgan stanley conference.

He mentions that BAC want to get Returns in low teens of tangible equity.

This puts EPS at around $1.75/share.( 13% of return of tangible equity at 13.4).

Bruce also says that by 2015 LAS expense will go down from $2.6B/qtr to 0.5B/qtr.

New BAC will provide savings of another $1B/qtr.

Total savings from LAS and New BAC will be around $12B/year.

If I add the savings to the current EPS run rate of 0.80, I get EPS of 1.80/share.

This is around 13.5% of tangible equity.

Going by what he says, we can expect of around $1.80 in 2015 which is BAC's target.

The above analysis does not assume any increase in tangible equity.

 

I would like to hear from other members on what they think of earnings once the savings are realized.

 

http://seekingalpha.com/article/1494362-bank-of-america-corporation-s-management-presents-at-the-morgan-stanley-financials-conference-transcript

[redskin]

Bruce is presenting at the Morgan stanley conference.

He mentions that BAC want to get Returns in low teens of tangible equity.

This puts EPS at around $1.75/share.( 13% of return of tangible equity at 13.4).

Bruce also says that by 2015 LAS expense will go down from $2.6B/qtr to 0.5B/qtr.

New BAC will provide savings of another $1B/qtr.

Total savings from LAS and New BAC will be around $12B/year.

If I add the savings to the current EPS run rate of 0.80, I get EPS of 1.80/share.

This is around 13.5% of tangible equity.

Going by what he says, we can expect of around $1.80 in 2015 which is BAC's target.

The above analysis does not assume any increase in tangible equity.

 

I would like to hear from other members on what they think of earnings once the savings are realized.

 

http://seekingalpha.com/article/1494362-bank-of-america-corporation-s-management-presents-at-the-morgan-stanley-financials-conference-transcript

 

They also had approximately $2 billion of litigation expense in each of the last two quarters.  The litigation should decline dramatically from those levels.  I think BAC should be able to earn around $25 billion annually.  If the interest rate environment improves and they get some loan growth it could approach $30 billion in my opinion.  Hopefully they will be able to repurchase a lot of shares over the next few years at reasonable prices. 

[nkp007]

Bruce is presenting at the Morgan stanley conference.

He mentions that BAC want to get Returns in low teens of tangible equity.

This puts EPS at around $1.75/share.( 13% of return of tangible equity at 13.4).

Bruce also says that by 2015 LAS expense will go down from $2.6B/qtr to 0.5B/qtr.

New BAC will provide savings of another $1B/qtr.

Total savings from LAS and New BAC will be around $12B/year.

If I add the savings to the current EPS run rate of 0.80, I get EPS of 1.80/share.

This is around 13.5% of tangible equity.

Going by what he says, we can expect of around $1.80 in 2015 which is BAC's target.

The above analysis does not assume any increase in tangible equity.

 

I would like to hear from other members on what they think of earnings once the savings are realized.

 

http://seekingalpha.com/article/1494362-bank-of-america-corporation-s-management-presents-at-the-morgan-stanley-financials-conference-transcript

 

One of our major concerns is what an interest rate spike will do to BAC.

 

We figure they're protected by:

 

1) High capital level

2) Increase in net interest income as interest rates rise

3) Cheap consumer deposits (provides some sort of cushion, though temporary)

4) Hedging

5) Constant fed stress tests / awareness of risks

 

Ultimately, Bank of America needs its earnings power to come through. TBV and BV are nice targets, but irrelevant if earnings power doesn't return. We think it will in a big way. Hopefully sometime in the next two years.

 

[Uccmal]

I have long used $2.00 per share as my medium term earnings guesstimate. 

 

Since the dividend debacle management has erred to the low side on virtually all counts, except maybe litigation expense.  I posit that Thompson is being conservative.  He doesn't want these statements coming back to bite him. 

 

I figure they are probably six months ahead of his time estimates. 

 

Npk007, Moynihan stated the other day that BAC would benefit from an increase in interest rates.  Large banks these days hedge out alot of the interest rate risk.  This is the major use of the derivatives that freak everyone out so much.

 

I guess a sudden 2-3% spike would be disturbing but I have a hard time trying to determine where this is going to come from, suddenly.  IMHO, it is more likely to happen gradually over the next decade or two.  Balance sheet recessions seem to be generational. 

[wescobrk]

Bruce is presenting at the Morgan stanley conference.

He mentions that BAC want to get Returns in low teens of tangible equity.

This puts EPS at around $1.75/share.( 13% of return of tangible equity at 13.4).

Bruce also says that by 2015 LAS expense will go down from $2.6B/qtr to 0.5B/qtr.

New BAC will provide savings of another $1B/qtr.

Total savings from LAS and New BAC will be around $12B/year.

If I add the savings to the current EPS run rate of 0.80, I get EPS of 1.80/share.

This is around 13.5% of tangible equity.

Going by what he says, we can expect of around $1.80 in 2015 which is BAC's target.

The above analysis does not assume any increase in tangible equity.

 

I would like to hear from other members on what they think of earnings once the savings are realized."

 

I think the run rate now is 30 cents a quarter. We should see this in 4 weeks when they report.

They should be at 2.20 a share by summer 2015 or q4.

 

 

[ERICOPOLY]

Once again they didn't post a presentation on the Investor Relations website.

 

I found a transcript though: 

http://finance.yahoo.com/news/bank-america-corporations-management-presents-163503678.html

[ScottHall]

That's a bit lower than Moynihan's target of up to 15% from last year, for what it's worth, unless Bruce counts that as "low teens."

[ERICOPOLY]

That's a bit lower than Moynihan's target of up to 15% from last year, for what it's worth, unless Bruce counts that as "low teens."

 

I remember late last year Moynihan gave a range of 13% to 15%.

[fareastwarriors]

http://www.bloomberg.com/news/2013-06-14/bofa-gave-bonuses-to-foreclose-on-clients-lawsuit-claims.html

 

 

.BofA Gave Bonuses to Foreclose on Clients, Lawsuit Claims

 

 

:P

[Cardboard]

http://finance.fortune.cnn.com/2013/06/17/interest-rates-banks-stress-tests/?iid=Lead

 

"At an investor conference last week, Bank of America CFO Bruce Thompson indicated that the bank could lose as much as $11 billion in its bond and loan portfolio if interest rates were to rise 1%. He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business. But the bank might not have to realize those losses immediately, or ever if it holds the debt and borrowers end up paying. Still, the bank's capital could fall, which is something both investors and regulators have watched closely since the financial crisis, and something that would show up on the bank's stress test."

 

I still have a substantial position in BAC which I have reduced recently and I am wondering if I should not reduce it again or even take it down to $0. Statements like these make me worried about BAC. Jamie Dimon clearly stated that JPM would make money if interest rates were to go up. He was also on the right side of the boat with subprime. BAC on the other hand appears to never be prepared for anything different than current conditions.

 

I too have a roughly $2 EPS target on BAC sometime in 2015 which I think they could achieve with cost cutting, better underwriting and the end of legacy/litigation issues. However, if they are to lose (2/3) of $11 billion on just a 1% move in interest rate and hurt their capital, then I have to wonder what happens if it moves by 1.5% or even 2%. These are tiny changes in interest rates by historical standard. And by the way, rates have already moved a bit, so is it a way to pre-announce poor results for Q2 and after?

 

While this loss on a 1% move would just be a net $0.50 EPS hit, I am more concerned about the culture of this company. This loss would (I guess we can say partially "will" now) likely be used as an excuse to hide underperformance elsewhere or for example to mask cost cuts benefits that have not been achieved. I also get the feeling that bonuses would still be paid since it would be argued that the bank doesn't control interest rates. In general, I am getting concerned that I have been too optimistic about what these guys could do vs what they will do. There is a very big difference in terms of rate of return if $2 EPS is achieved in 2017 vs 2015. It would still be acceptable, but not great.

 

Cardboard

[dcollon]

Cardboard,

 

Your question is a good one, but one that I don't think can be answered easily, by Bruce, Jamie or anyone else.  Obviously we can all run "curve" models and try to figure out what a parallel shift vs. the long end moving vs. the short end moving would do to income statements and balance sheets, but we won't know which one to pick.  We can probability weight them and try to figure out the downside, but then we don't know the second, third, etc...derivative of what else happens once it starts to play out. 

 

There have been times in the past that no one wanted to touch banks with big securities books because of the fear of rising interest rates.  There is no question that there is a large risk with so many securities on the balance sheet for all the banks, just not the big ones.  With securities making up 15-40% of total assets for some banks plus leverage on top of it...It scares me as well. 

 

 

[MYDemaray]

Interest rates rising 1% is such a vague statement.  Doubt we'll see Fed Funds up 100bps anytime soon, but long end could easily do that.  So, hard to know where there exposures are...

[Uccmal]

Cardboard, Very astute as always.

 

If we look at Risk weighted assets and fully phased in Tier 1 Capital for Basel 3.

 

Present: 129/1354 = 9.5%

 

Adjusted for a sudden 11 B loss

 

= 117/1354 = 8.6 %  This is still above the requirement for 2019, correct?

 

As per Thompson's comments this would be unrealized.  However, it would be marked against earnings the same as DVA adjustments. 

 

There is a reason I have bought puts against a portion of my holdings.  I dont trust management of this or any other bank, or for that matter 99% of the companies out there.  Very, very few management groups will tell you how it really is.  A year ago JPM got caught in its own web of deceit.  Either Dimon knew about the situation and downplayed it, or he actually didn't know.  Which is worse?

 

To give Dimon the benefit of the doubt, I would say he didn't know.  That should tell us alot in itself. 

[xazp]

I think you are misinterpreting a few statements. 

 

First back up and understand the mechanics.  For nearly every bank today, deposits exceed their loans.  So the excess deposits are invested in bonds.  Most banks have created a short-term bond portfolio with a duration around 2 years.  This is true of BAC, JPM, C, WFC, and most of the banks below them. 

 

When interest rates rise, the value of bonds goes down.  So when BAC says they will "lose money" they're referring to the value of that bond portfolio, which will go down as interest rates rise.  This is true of every bank that holds bonds (which is almost every bank).  My recollection is that WFC is the most aggressive here - they've stretched the furthest for yield on their bond portfolio.  But everyone holding bonds is losing value on those bonds this quarter. 

 

When JPM says they will only earn money from higher interest rates, it's because loss/gains on these bonds are not recorded as earnings.  They go on a separate part of the balance sheet called AOCI.  When BAC tells you they could lose up to $11Bn, they're just disclosing their potential loss in AOCI.  Neither will hit actual earnings, but both will take hits to book value.  This is just BAC giving greater disclosures, and JPM glossing over it.  In reality, I see few analysts even pay attention to AOCI, since it's not part of earnings. 

 

When Bruce talks about how the bonds can regain value, what he's talking about is holding them until maturity when they'll be worth par.  This too is not magic; he's indicating that a loss on AOCI doesn't matter because they're holding them until maturity. 

 

JPM and WFC are not magical; the mechanism is exactly the same.  When interest rates rise, they will all take hits to AOCI, and all see earnings grow due to NIM expansion, and they'll probably sit on the bonds until maturity when the AOCI loss will be reversed. 

 

http://finance.fortune.cnn.com/2013/06/17/interest-rates-banks-stress-tests/?iid=Lead

 

"At an investor conference last week, Bank of America CFO Bruce Thompson indicated that the bank could lose as much as $11 billion in its bond and loan portfolio if interest rates were to rise 1%. He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business. But the bank might not have to realize those losses immediately, or ever if it holds the debt and borrowers end up paying. Still, the bank's capital could fall, which is something both investors and regulators have watched closely since the financial crisis, and something that would show up on the bank's stress test."

 

I still have a substantial position in BAC which I have reduced recently and I am wondering if I should not reduce it again or even take it down to $0. Statements like these make me worried about BAC. Jamie Dimon clearly stated that JPM would make money if interest rates were to go up. He was also on the right side of the boat with subprime. BAC on the other hand appears to never be prepared for anything different than current conditions.

 

I too have a roughly $2 EPS target on BAC sometime in 2015 which I think they could achieve with cost cutting, better underwriting and the end of legacy/litigation issues. However, if they are to lose (2/3) of $11 billion on just a 1% move in interest rate and hurt their capital, then I have to wonder what happens if it moves by 1.5% or even 2%. These are tiny changes in interest rates by historical standard. And by the way, rates have already moved a bit, so is it a way to pre-announce poor results for Q2 and after?

 

While this loss on a 1% move would just be a net $0.50 EPS hit, I am more concerned about the culture of this company. This loss would (I guess we can say partially "will" now) likely be used as an excuse to hide underperformance elsewhere or for example to mask cost cuts benefits that have not been achieved. I also get the feeling that bonuses would still be paid since it would be argued that the bank doesn't control interest rates. In general, I am getting concerned that I have been too optimistic about what these guys could do vs what they will do. There is a very big difference in terms of rate of return if $2 EPS is achieved in 2017 vs 2015. It would still be acceptable, but not great.

 

Cardboard

[ERICOPOLY]

He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business.

 

This should be a positive event for the stock's valuation.

 

Let's pick some random numbers here.  Let's say 60 cents per share is 3x 20 cents per share.

 

What's 10x multiple on 20 cents per share?  It's $2.00.

 

That's much larger gain in the stock value than the one time 60 cent hit.

[jay21]

He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business.

 

This should be a positive event for the stock's valuation.

 

Let's pick some random numbers here.  Let's say 60 cents per share is 3x 20 cents per share.

 

What's 10x multiple on 20 cents per share?  It's $2.00.

 

That's much larger gain in the stock value than the one time 60 cent hit.

 

Yeah, that means they are making money in that environment similar to Dimon's comments.  A rating agency report I read awhile ago said that JPM and BAC would most likely be similarly affected by changes in rates with JPM most likely doing slightly better (because of a little more reliance on fee income and a wider loan to deposit spread).

 

Also, that 60 cent hit would be amortized back as the bonds approach maturity so it would just be a timing issue as xazp alluded to.  Very nice reply xazp.

[ERICOPOLY]

The alternative scenario is that interest rates don't go up, and they use that same $11b of capital for share repurchases.

 

Let's say they buy back $11b in stock this quarter (I know they aren't approved to do it, but just suppose...).

 

Does it reduce capital levels by $11b?  Yes.  That's the same hit to capital levels as the 1% rise in interest rates. 

 

Which would improve forward EPS more?

 

I'm betting the rise in interest rates wouldn't be materially different from the same amount of capital spent on share count reduction.  I haven't run the math, but I'm leaning towards the rising interest rates being the scenario that would have the greater positive impact on EPS.