BAC-WT - Bank of America Warrants

[mankap]

BAC is not far from 6%.

To go from 5.79% to 6% BAC will need additional 4B in capital.

This is assuming all the assets 2.2T are counted including cash and treasuries towards calculating leverage.

If they are not there , they will be at 6% in 1-2 qtrs

[xazp]

Yes, so under US GAAP there is no problem.  It's IFRC that would matter (if they go that path), but my conclusion is this is not the big deal I originally thought. 

 

My snide remark would be, Fed should follow its own rules.  If the Fed had to obey the 3% or 6% leverage rules, you'd have a global market rout the next day as they sold off an incredible amount of securities.  I think Fed has ~$50Bn in capital, so at the 6% leverage ratio rule, they'd have to sell off $2.2 trillion of securities! 

 

BAC is not far from 6%.

To go from 5.79% to 6% BAC will need additional 4B in capital.

This is assuming all the assets 2.2T are counted including cash and treasuries towards calculating leverage.

If they are not there , they will be at 6% in 1-2 qtrs

[xazp]

You know, I tracked down this article, and the $11Bn number they cite is bogus.  Bruce never said it - the reporter is misinterpreting.  Here is the full transcript

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

I'd be okay if the reporter wrote $5Bn for a 1% rise in the 10-year (relative to Q1 end, that'd be 2.9%, which we're not at). 

 

It took me some time to reverse engineer that $11Bn number - where does it come from? 

1)  $1.7Bn increase in NIMs if the 10-year rises 1%.  $3.7Bn increase in NIMs if the entire yield curve rises 1%. 

2)  (separate question) - they expect 2.5 - 3 years in NIM to equal the AOCI loss from higher rates

3)  The reporter multiples 3 x $3.7B = $11Bn. 

 

Reporter is making two mistakes.  First, short rates are not rising, so the $3.7B number doesn't even matter.  But more importantly, you don't take the same AOCI hits to short-term rates that you do to long-term rates.  If you hold a 10-year duration security, a 1% move means you are taking a 10% hit (1% a year).  If you hold a 3-month duration security, a 1% move means you're taking a .25% hit.  The hits to AOCI if the short-end rises should be smaller than the long-end.

 

 

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

[Uccmal]

Well, that's been fun.  Sold all my puts - about 30-35 % profit on those.  Turned around and bought some 2015 * 12s. So much for tax avoidance. 

 

 

[onyx1]

You know, I tracked down this article, and the $11Bn number they cite is bogus. 

 

xazp - Thanks for taking the time to clear this up the confusion caused by this reporter.

[PlanMaestro]

Bank of America rejects AIG bid to reopen $8.5 bln mortgage accord (via@mdemaray)

 

http://www.reuters.com/article/2013/06/27/bankofamerica-mbs-settlement-idUSL2N0F31OG20130627

[AZ_Value]

Bank of America rejects AIG bid to reopen $8.5 bln mortgage accord (via@mdemaray)

 

http://www.reuters.com/article/2013/06/27/bankofamerica-mbs-settlement-idUSL2N0F31OG20130627

 

Come on AIG, Go away already. The check already cleared... 2 years ago... you liked it back then.

[PlanMaestro]

Bank of America Said to Send Property Reviews to India

http://www.bloomberg.com/news/2013-06-27/bank-of-america-said-to-send-property-reviews-to-india.html

 

[Olmsted]

Bank of America Said to Send Property Reviews to India

http://www.bloomberg.com/news/2013-06-27/bank-of-america-said-to-send-property-reviews-to-india.html

 

This is a smart move, and is becoming more common - if you are big enough to have the scale to get over the hurdle costs of setting up such an operation.  Altisource portfolio solutions does this.  And mortgage quality-control/forensic review company Digital Risk was just bought by MphasiS - an Indian IT outsourcing company (itself 60% owned by HP).  Moving some operations to India was clearly one of the synergies that made the deal work - the company has already set up a Bangalore office. 

 

I have an investment in a small mortgage quality-control company, and seeing this trend is making me wonder whether they will remain cost-competitive.

[xazp]

FWIW just read a report on proposed leverage ratio changes. 

 

If they leave cash + treasuries off the calculation, every company is basically at 6%+ already. 

 

If they don't, simple balance-sheet manuevers get them there.  For example, decreasing lines of credit, optimizing derivatives, etc. 

 

The report I read suggests it's not something that will cause capital raises or reduced dividends regardless of the final rule. 

 

Might be related to

http://www.bloomberg.com/news/2013-06-21/u-s-weighs-doubling-leverage-standard-for-biggest-banks.html

 

WFC is up

 

Do you think? :-X

 

5.1% to 6% - they will likely reach that years ahead of any implementation.  Can you say market overreaction....

 

Sold around 50% of my puts... not buying anything right now.

[dcollon]

Basel Risk Weightings for Mortgages (see attached comments)

Basel_Risk_Weightings.pdf

[Liberty]

http://www.bloomberg.com/news/2013-07-02/tarullo-says-fed-very-close-to-leverage-ratio-proposal.html

 

JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Goldman Sachs Group Inc. are among eight U.S. banks facing a new round of domestic rules on capital and debt that would be even stricter than global standards approved today.

 

Regulators will push banks to maintain a leverage ratio of capital to assets that exceeds the 3 percent minimum set by the Basel Committee on Banking Supervision, Federal Reserve Governor Daniel Tarullo said today, and the Federal Deposit Insurance Corp. said a proposal may be published next week. Another measure “in the next few months” would compel banks to hold a set amount of equity and long-term debt to help regulators dismantle failing lenders, Tarullo said.

[mankap]

Analysts are raising their forecast for 2Q Earning for BAC.

One of the analyst raised his forecast to 0.27.

[fareastwarriors]

http://www.cnbc.com/id/100870726

 

FDIC to Tighten Screws on Banks, Require 5% of Assets

 

[fareastwarriors]

http://www.bloomberg.com/news/2013-07-10/u-s-banks-seen-freezing-payouts-as-harsher-leverage-rules-loom.html

 

U.S. Banks Seen Freezing Payouts as Harsher Leverage Rules Loom

 

[Sunrider]

http://www.bloomberg.com/news/2013-07-10/u-s-banks-seen-freezing-payouts-as-harsher-leverage-rules-loom.html

 

U.S. Banks Seen Freezing Payouts as Harsher Leverage Rules Loom

 

So admittedly I didn't read the specifications of the proposal but back of the envelope from BAC's last 10K

 

Common equity = 218,188

Total Assets = 2,209,974

Ratio = 9.8% = non event?

 

[A_Hamilton]

http://www.bloomberg.com/news/2013-07-10/u-s-banks-seen-freezing-payouts-as-harsher-leverage-rules-loom.html

 

U.S. Banks Seen Freezing Payouts as Harsher Leverage Rules Loom

 

So admittedly I didn't read the specifications of the proposal but back of the envelope from BAC's last 10K

 

Common equity = 218,188

Total Assets = 2,209,974

Ratio = 9.8% = non event?

 

1.) you need to use tangible common equity and 2.) for the leverage ratio, assets include some off balance sheet assets which is why JPM and others come in lower than what it reads.

 

This is all insanity though. At some point these higher capital ratios will retard growth.

[rkbabang]

Not a lot of BAC-talk here lately, everyone must be patiently waiting for earnings.  New 52wk high right now  >$14.

 

[MYDemaray]

Love this part of Mark Palmer's recap (http://www.btigresearch.com/2013/07/16/bank-of-america-day-13-sees-questions-raised-over-changes-or-not-to-pooling-and-servicing-agreements/#ixzz2ZE0lQriT) today:

 

"Judge Barbara Kapnick informed Kravitt that he would need to return for a sixth day, at which point he lowered his head into his hands for about 10 seconds. "

 

[wescobrk]

Citi went from 9.3 to 10 in one quarter for tier 3 Basel!

We should see a big jump from BAC as well. Forget year end from analysts saying it'll hit 10 for tier 3.

It'll be a lot sooner than that!

[xazp]

That extra sized jump is because they sold MSSB to MS. 

 

Citi went from 9.3 to 10 in one quarter for tier 3 Basel!

We should see a big jump from BAC as well. Forget year end from analysts saying it'll hit 10 for tier 3.

It'll be a lot sooner than that!

[Parsad]

Not a lot of BAC-talk here lately, everyone must be patiently waiting for earnings.  New 52wk high right now  >$14.

 

Not much to talk about with all of the banks.  They are in fantastic shape and getting better every day.  They are the best capitalized in the world, and will be even stronger once they meet the new U.S. standards being implemented.  They are making money hand over fist and running off bad loans, while writing better quality loans.  The risk is that things could loosen up again, and they could start writing poor quality loans again, but I think that is a bit of a ways off.  Most of the banks that don't have to service their runoff business, are jacking up their dividends and returning capital.  Simply not much left to talk about the banks because they've made the move from distressed corporations to healthy corporations.  Cheers! 

[hyten1]

for me the only thing to think about are:

 

1. the lawsuit (still like for it to be resolve to feel better)

 

2. when to sell if ever?

 

 

[Cardboard]

Well, I am preparing mentally for another disappointing quarter from BAC and to sell if that is the case. Like I said before it is their last chance for me. I have had enough of their few pennies EPS each quarter and of all their excuses.

 

On the other hand, if they finally get their act together and start to deliver earnings and decent ROA like all other big banks then I will be happier.

 

Cardboard

[Uccmal]

Well, I am preparing mentally for another disappointing quarter from BAC and to sell if that is the case. Like I said before it is their last chance for me. I have had enough of their few pennies EPS each quarter and of all their excuses.

 

On the other hand, if they finally get their act together and start to deliver earnings and decent ROA like all other big banks then I will be happier.

 

Cardboard

 

Got my puts back in place just in case....