BAC-WT - Bank of America Warrants

[ERICOPOLY]

@Eric, In perfect situation that would make sense but I see the total authorization next year will be $20B.  ($10B calling preferrd, $7B in share repurchase and $3B in dividends). 

 

Thanks,

S

 

I think they've spent $6b on preferred retirement this year.  Plus $2b on buybacks.  Plus legal settlements above reserves, and now they suggest they've got another $5b of potential legal expenses above reserves yet to come.  Then they've got $3b still to spend on buybacks for Q3, Q4, and Q1.

 

So that's:

$6b+$2b+$5b+$3b.

 

That's $16b.

 

Next year let's hope they can concentrate that same $16b on the buybacks.

 

Calling $10b preferred will leave them with slightly under $6b preferred remaining.  I suppose that's not a bad thing.

[xazp]

There are two things that distinguish BAC from the other banks in terms of FHFA litigation.

1)  The existence of the $8.5Bn settlement over countrywide;

2)  The court's decision to remove BAC from the litigation (i.e. FHFA can only sue the essentially worthless Countrywide Sub). 

 

IMO it makes zero sense to negotiate a settlement before the outcome of the $8.5Bn master settlement is complete.  Also IMO if the court turns down the $8.5Bn settlement, BAC should just declare CFC bankrupt and let everyone fight each other over the scraps.  I think that would generate billions of dollars in reversed reserves. 

 

A few years ago, the reason BAC did not simply bankrupt CFC was they were worried that people would lose confidence in the Merrill Sub.  But see BAC just absorbed Merrill into the BAC organization (plus, no one worries any more that BAC is insolvent) - so to me, if people get too pushy, CFC should just go out the door. 

 

 

 

 

Wells Fargo has also settled with FHFA. I expect BAc will also settle soon.i think we will see the news in couple of weeks.

 

Pressure rises on holdout banks as Wells settles with FHFA

The price tag - obscured by a confidentiality agreement - is believed to less than $1B, reports the FT (a far cry from JPM's $5.1B settlement). Wells (WFC -0.4%) was the only large U.S. bank to not be named when the FHFA filed suit against 17 lenders in 2011 - apparently because it had already entered into settlement discussions with the GSE regulator.In addition to the Bank of Dimon's settlement last week, Ally Financial reports it expects to soon reach a deal, and HSBC boosted reserves - a sign a settlement is nearing.This ramps up the pressure on holdouts like Bank of America (BAC -0.9%), RBS, Deutsche Bank (DB -0.7%), and Credit Suisse (CS -0.4%) - all of which have large exposure to FHFA cases - to cut their own deals. Extrapolating the JPMorgan settlement leads to a range of payments of $1.7B to $7B for these four lenders, says the FT, which has reported the FHFA is pressing BofA for more than $6B.

[MYDemaray]

Agree on the Countrywide bit, but on the FHFA bit, aren't there 3 separate suits?  One separately against each BAC, Merrill and CFC. And the successor liability was obviously only thrown out for the CFC deal...so they'd still have to resolve the other two on terms that are probably similar to UBS or whatever ballpark of JPM.

[xazp]

Yes, I agree with all that.  But, CFC is going to be the largest/most expensive of the three, and I don't think BAC is going to announce a settlement with the FHFA until they can get all three worked out.  So that's the primary reason I don't think you'll see any news from BAC on the FHFA front until the $8.5Bn settlement resolves itself. 

 

In some ways I think BAC ended up doing OK here.  They did a bunch of settlements before the government got really bloodthirsty (and while BAC itself was still somewhat precarious financially).  I think some of these government suits would cost more had they fought in court until now. 

 

 

 

Agree on the Countrywide bit, but on the FHFA bit, aren't there 3 separate suits?  One separately against each BAC, Merrill and CFC. And the successor liability was obviously only thrown out for the CFC deal...so they'd still have to resolve the other two on terms that are probably similar to UBS or whatever ballpark of JPM.

[ERICOPOLY]

I've been comparing the quality of the BAC deposit base today versus where it was in 2006.  I'm wondering whether the NIM should increase to a higher than historical level as rates rise.

 

 

Today, 33% of deposits are noninterest-bearing.  In 2006 it was 26%.

 

Today, 84% of interest bearing deposits are comprised of the categories "Savings" and "NOW and money market deposit accounts".  Back in 2006 those categories were only 61% of interest bearing deposits.

 

Listed below I have the total amount deposited in each category and the interest rate paid on those deposits.

 

You can see that back in 2006 when rates were higher, the "Consumer CDs and IRAs" cost 416bps, whereas the "NOW and money market deposit accounts" cost only 180 bps. 

 

So they have done a good job with moving away from the far more expensive "Consumer CDs and IRAs", and relying more on "NOW and money market deposit accounts".  Plus, relying more on noninterest-bearing deposits.

 

Next time rates go up to prior levels, things should be more profitable.  Cheaper deposit base than before.

 

- Eric

 

 

 

2013:  84% of interest bearing deposits in cheapest categories (first two categories listed)

      44b @ 0.05%  Savings

    508b @ 0.08%  NOW and money market deposit accounts

      81b @ 0.56%  Consumer CDs and IRAs

      24b @ 0.42%  Negotiable CDss, public funds and other time deposits

    657b total domestic interest bearing deposits   

      69b total foreign interest bearing deposits

    364b noninterest-bearing deposits  (33% of all deposits are noninterest-bearing)

   

 

2006:  61% of interest bearing deposits in cheapest categories (first two categories listed)

      34b @ 0.78%  Savings

    218b @ 1.8%  NOW and money market deposit accounts

    144b @ 4.16%  Consumer CDs and IRAs

      12b @ 3.97%  Negotiable CDss, public funds and other time deposits

    409b total domestic interest bearing deposits

      86b @4.39% total foreign interest bearing deposits

    177b total noninterest-bearing deposits (26% of all deposits are noninterest-bearing)

[jay21]

Eric, you do not make any adjustments for incentives changing?

 

Maybe zero interest rate deposits were lower because rates were higher?  Now there isn't as a big a difference between the two.

[ERICOPOLY]

Jay,

You raise a good point.  They will likely lose some cheap deposits as rates rise.

 

Fortunately, they won't have to immediately replace them dollar for dollar with more expensive ones.

 

They presently utilize only 85% of deposits, versus 97% in 2006.  And new loans will be funded (for a time) with deposits that are freed up as problem loans are runoff.

 

 

 

Total Loans and Leases

 

2006:  $652b  (97% of deposits)

Today:  $924  (85% of deposits)

 

Total deposits:

 

2006:  $672b

Today:  $1,090

 

 

Separately, I was curious about how the LT debt picture has changed.

 

LT Debt:

 

2006:  $130b @ 5.41% 

Today:  $258b  @ 2.65%

 

[fareastwarriors]

http://www.cnbc.com/id/101168422

 

Bank of America wins dismissal of lawsuit on AIG disclosures

[wescobrk]

http://www.cnbc.com/id/101172546 (Moynihan on cnbc today)

 

"Separately, Bank of America recently said losses tied to litigation could rise to as much as $5.1 billion, up from an estimated limit of $2.8 billion last quarter. That prompted UBS on Friday to lower its price target on the bank to $15.60 from $16 a share."

 

Can someone help me with their math? On an after tax basis that is about 1.5 billion or roughly 15 cents, not sure how they get a 40 cent reduction?

 

I agree about trading at least 1.1x tangible book as opposed to trading at tangible book.

 

[fareastwarriors]

http://blogs.wsj.com/moneybeat/2013/11/06/bank-of-america-ceo-brian-moynihan-housing-market-fairly-stable/?mod=WSJ_hps_MIDDLENexttoWhatsNewsThird

 

BofA CEO: Housing Market ‘Fairly Stable’

[fareastwarriors]

Brian Moynihan interviews with WSJ

 

 

http://live.wsj.com/video/viewpoints-brian-moynihan-on-consumer-confidence/635CAD41-CFEB-4B3B-B03E-3F8CCFA92AC5.html#!B051DF19-C90E-4A72-ACD9-F170517573F5

 

 

http://live.wsj.com/video/viewpoints-brian-moynihan-on-consumer-confidence/635CAD41-CFEB-4B3B-B03E-3F8CCFA92AC5.html#!30793B93-A97C-4B8B-930A-7193F4E14656

 

 

http://live.wsj.com/video/viewpoints-brian-moynihan-on-consumer-confidence/635CAD41-CFEB-4B3B-B03E-3F8CCFA92AC5.html#!635CAD41-CFEB-4B3B-B03E-3F8CCFA92AC5

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-06/bofa-said-in-settlement-talks-over-credit-card-add-on-products.html

 

BofA Said in Settlement Talks Over Credit-Card Add-On Products

[blainehodder]

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=7y86MdPU9h2Tl_PLUS_WgxeW20A==&system=prod

 

Fantastic argument to approve article 77 settlement.

[ERICOPOLY]

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=7y86MdPU9h2Tl_PLUS_WgxeW20A==&system=prod

 

Fantastic argument to approve article 77 settlement.

 

I read this guy's article a while back.  It sounds convincing too -- except it sounds convincing that the settlement should NOT be approved because of BONY's conflict of interest:

 

http://www.subprimeshakeout.com/2013/07/objectors-siren-song-enchants-during-article-77-proceeding.html

 

But I'm not a lawyer and I don't understand what the important points are.

[xazp]

IMO the objectors are playing with fire here.  Because one possible outcome is the court says, the settlement will apply to the 93% that didn't object.  And the 7% are free to pursue other means.  Well, it's basically impossible for that 7% to reach the 25% threshold to force BONY to act, and all the statute of limitations/etc have long since expired.  Basically, that 7% will end up with nothing (which is what the supporters of the settlement have been saying all along). 

 

I stand by my earlier comments that a rejection (which I don't see happening) would result in BAC paying less than $8.5Bn, primarily because they can engineer a version of this; i.e. pay PIMCO, Blackrock (etc) their portion of the settlement.  Once those guys are out, the remaining people can't really reach the 25% threshold. 

 

 

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=7y86MdPU9h2Tl_PLUS_WgxeW20A==&system=prod

 

Fantastic argument to approve article 77 settlement.

[blainehodder]

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=7y86MdPU9h2Tl_PLUS_WgxeW20A==&system=prod

 

Fantastic argument to approve article 77 settlement.

 

I read this guy's article a while back.  It sounds convincing too -- except it sounds convincing that the settlement should NOT be approved because of BONY's conflict of interest:

 

http://www.subprimeshakeout.com/2013/07/objectors-siren-song-enchants-during-article-77-proceeding.html

 

But I'm not a lawyer and I don't understand what the important points are.

 

Haha. I read that one too. The objector's argument seems flimsier to me (including ad hominem attacks and factual errors), but I'm not a lawyer. I look forward to Isaac's inevitable post on this.

[ERICOPOLY]

http://www.cnbc.com/id/101172546 (Moynihan on cnbc today)

 

"Separately, Bank of America recently said losses tied to litigation could rise to as much as $5.1 billion, up from an estimated limit of $2.8 billion last quarter. That prompted UBS on Friday to lower its price target on the bank to $15.60 from $16 a share."

 

Can someone help me with their math? On an after tax basis that is about 1.5 billion or roughly 15 cents, not sure how they get a 40 cent reduction?

 

I agree about trading at least 1.1x tangible book as opposed to trading at tangible book.

 

Well... $2.3 billion.  That's slightly less than 1/2 of what they generated in Q3 pre-tax.  So this is like getting a 6 week "time out" by your government/parents.

 

[wescobrk]

It's dropped so much I'm hoping now it drops below 13.60 to buy below tbv from September.

The last 2 quarters it earned about 10 percent on tbv (backing out uk tax rate adjustment).

We are already clocking 10percent tbv with maybe 12 percent next year.

I'll wager heavily it won't stay below tbv for long.

[ERICOPOLY]

It was $13.62 at end of September.  By this time next week, you have another 1/2 quarter of earnings.  Maybe another 15 cents the way the last two quarters went.  So that's $13.77.  Today stock hit low of $13.85.  You've only got 8 cents or so above next week's estimated tangible book.

 

EDIT:  Okay, it hit low of $13.80 towards the end.  So 3 cents above next week's estimated tangible book value.

[Luke 532]

For those that like spreads and think BAC will trade at or above it's current book value of $20 by January 2016 (26 months)... the 17/20 Jan 2016 bull call spread is going for about $0.60.  Risk $1, Profit $4 ($0.60 vs $2.40).

[ERICOPOLY]

It's dropped so much I'm hoping now it drops below 13.60 to buy below tbv from September.

The last 2 quarters it earned about 10 percent on tbv (backing out uk tax rate adjustment).

We are already clocking 10percent tbv with maybe 12 percent next year.

I'll wager heavily it won't stay below tbv for long.

 

I think it's at 9% on TBV these past two quarters (averaging 30 cents a quarter). 

 

Those quarters were both aided by reserve releases.  It is still pretty ugly right now, although I don't believe it's ugly to the tune of $75 billion dollars which is the current discount to book.

[MYDemaray]

A beautiful read. H/t @planmaestro

 

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=7y86MdPU9h2Tl_PLUS_WgxeW20A==&system=prod

 

[ERICOPOLY]

They provisioned $300m for credit losses in Q3 and earned 28 cents a share.  Somewhere I saw it suggested that about $1.5b would be the normalized quarterly provisioning.

 

That's $1.2b that effectively padded earnings.  At 35% tax rate, about 6.8 cents per share.

 

So that 28 cents net income adjusts down to 21.2 cents.

 

That's only 6.3% annualized return on tangible book...

 

Then add the remaining 600m per quarter of NewBac savings (it adds 3.4 cents per quarter for total of 24.6 cents):

 

7.3% annualize return on tangible book after pretending the NewBac savings were complete..

 

Then add the remaining LAS cost savings of $1.7b per quarter (it adds 9.6 cents per quarter for total of 34.2 cents):

 

10.2% annualized return on tangible book.

 

So there you have it... completion of New BAC, LAS expenses down to only 500m per quarter, and normalized provisioning of $1.5 billion gets you only to 10.2% return on tangible book.

 

You need an additional $1.65 billion worth of pre-tax expense saves per quarter to get up to 13% return on tangible equity. 

 

Where can $1.65 billion come from?  Well Q3 had $1.1b litigation expense, so roughly 600million in excess litigation expense if 500 million per quarter is considered to be the normalized level of litigation expense.  Saving 600m a quarter there would add 3.4 cents per share per quarter, bringing the quarterly total to 37.6 cents a quarter.  That's 11% return on tangible equity.

 

Then you need to merely find another $1.05 billion (pre-tax) of expense savings per quarter.

 

It's not coming from litigation.

It's not coming from LAS.

It's not coming from NewBAC.

 

Where is it coming from?  I guess it doesn't have to come from expenses.  They could instead generate an extra $1.05 billion in revenue per quarter.

 

But there you have it -- we've got about 11% return on tangible equity if all of the planned expense cuts were already phased in and litigation expense were down to 500 million per quarter normal level. 

 

That would be about $1.48 per share in earnings, or $18.50 share price at 12.5x earnings.  Assuming $13.50 tangible book value and 11% return on tangible equity.  So about 34% increase in share price.

 

But let's talk about 13% return on tangible equity -- they can get there, but they either need to find more expense savings or they need an extra $1.05 billion per quarter in revenue.

 

I guess Q3 was crappy fixed income trading and the mortgage origination business is slow -- they have loans in runoff that will be replaced with new loans, and such.  Ideas on how much should be contributed by each of those categories?

 

EDIT:  Well, I guess they grew total loans and leases by $41 billion over the past year.  Two more years like that at 5% yield, and that's $1b a quarter in revenue.  They've already got the deposits just sitting there.  Plus, I believe they got rid of some loans that were yielding nothing and yet still added $41 billion to total loans -- all the more reason why they could get $1b a quarter extra in revenue just from the loans... over next two years.

 

So I guess I feel better now... getting to 13% return on tangible equity by 2016 is attainable if they get loan growth similar to last year's over each of the next two years.  That would be $22 share price at 12.5x earnings -- it's $1.75 per share earnings based on $13.50 TBV and 11.5b shares.  But that doesn't include the money they generate between now and then.

[ERICOPOLY]

Over the last twelve months, servicing income has dropped from $1.6 billion per quarter down to just 600 million per quarter.

 

They reduced LAS expenses from $2.9b to $2.2b over the same period.

 

So that's $1b less servicing income, and $0.7b less LAS expense.

 

This has been a bad trailing 12 months of waiting for LAS cost savings to shine through.

 

PS:  They sold off a lot of servicing rights over the past year.  How long will it take them to rebuild their servicing income stream back up to $1.6 billion per quarter level?  Have they talked about that?  And it was $2.1 billion per quarter back in Q4 11.  Am I counting the right thing... does servicing income bounce around with the MSR valuation in such a way that is obscuring reality?

 

EDIT:  Ahhh.... page 44 of the 10-Q deals with servicing rights.  It says the sales have led to $150m drop in quarterly revenue since Q3 2012.

 

Okay, page 44 of the 10-Q claims that the MSR sales have reduced revenue by about $150m per quarter since Q3 2012.

[wescobrk]

Eric,I got home late and have to be up in 5 hours for work.

Thanks for going through the numbers.

I'll go through the post in more detail tomorrow but how about steeping yield curve?

Qe should be over by dec of 2014. We should have a 10 year north of 3 percent.

I certainly don't expect to get anywhere near wells with their returns but Jpm has been earning 15 percent on tbv for years.

I guess your math is correct but a mediocre bank should earn 1 percent roa or ten percent roe which is about 2 bucks a share. Obviously wells will do a lot better than that.

If in 2016 bac is only earning 1.75 a share I don't see it worth the risk of owning it now. We will make money if it hits 20 by 2016 but I'm expecting it'll hit 20 before then. If we get some crazy euphoria maybe in march after ccar it'll get to 18 but it'll probably drop after that.

I saw you used 11.5 billion  for shares. I'm assuming that will be south of 11 billion fully Diluted by then but it must be the nim plus share buybacks to get us to 50 cents a quarter by q2 of 2015.

At some point the regulators will let banks return 50 percent in dividends and that could happen by 2015 at the rate balance sheets are building up which is a big lift from the 30 percent now.

 

Sorry this is typed a bit sloppy as this tablet is a bit tricky but nim and buybacks I guess are the only way to get to 2 bucks if your math is right.