BAC-WT - Bank of America Warrants

[ERICOPOLY]

Regarding share repurchases, I wonder if it will go something like this:

Q2 13:  ~$1b

Q3 13:  ~$1b

Q4 13:  ~$1.5b

Q1 14:  ~$1.5b

Q2 14:  ~$2b

Q3 14:  ~$2b

Q4 14:  ~$2.5b

Q1 15:  ~$2.5b

 

So far it fits the pattern.  Except Q3 came in $100m light.  I'm just trying to make sense out of why they've steadily held to just $1b per quarter so far.  They might have been told to meter it out over the year as earnings come in, and to cut it back if they don't.

 

After all, the whole point of the buyback instead of dividends thing (from the Fed's point of view) is to make sure they can cut them back in onset of recession.  It would defeat the purpose if the banks were to buy it all in the first week of the year.  In fact, that makes such perfect sense that I'm certain this is what is going on.

[xazp]

What is your view of BAC's earnings over the next 10 years?  I say, at least $150Bn, or $15Bn/year. 

 

The Fed and/or BAC can reduce shareholder payments to $5Bn - but only for so long.  At some point, I think the shareholder payments have to asymptote towards their long-term average earnings, which I hypothesize are $15Bn a year or more. 

 

You mention a recession as an obstacle.  But, remember the Basel 3 metrics already include a buffer for a recession.  And then a "big bank" surcharge.  And on top of that a BAC (self-imposed) conservative surcharge.  Those buffers are there so that BAC can continue operating "normally" in a recession, and to a degree, even if they had less than $15Bn in earnings per year during the recession, conversely, they have paid out, what, $6Bn over the entire recovery from 2009-2013?  So they've been storing seed corn for that time, and I don't necessarily think it means they have to stop either lending or capital returns. 

 

I also believe their 2008 problems are mainly from poor lending discipline (countrywide in particular).  If you see BAC starting to make loans that just don't "feel right" then run the hell out.  I mean, the whole time Countrywide was doing these no-doc, no-verification loans, I was thinking WTF is going on here???  It didn't make sense to me.  To me, exuberant lending without discipline is the real destroyer of wealth - a garden variety recession is not the same magnitude of problem. 

 

 

 

 

Alright, so they approve a $15b dividend which cannot be easily retracted.  This can go on as long as the economy goes well -- I agree.

 

Then, beginning in June, we tip back into recession and NIM gets squeezed as long rates fall again.  Perhaps the 10 yr drops to 1%.  Also, they have to boost reserves.

 

So that's why I don't think they'll approve $15b in dividends.  It cuts it too fine when you throw in recessions.  I think the Fed will let them pay out a dividend that takes recessions into consideration.  Then they will approve extra capital return above that through share repurchases -- with the intention of cutting them if recession pops up.

 

I doubt they will take into account the tax benefits when they approve the dividend -- the tax benefits will be all used up, and then what?  So they will base recurring payouts like dividends on the after-tax income IMO.

[ERICOPOLY]

You mention a recession as an obstacle.  But, remember the Basel 3 metrics already include a buffer for a recession.  And then a "big bank" surcharge.  And on top of that a BAC (self-imposed) conservative surcharge.  Those buffers are there so that BAC can continue operating "normally" in a recession

 

Let's say their normal earning power is $23 billion (11.5 x $2).  They retain 30% to support future organic growth, and payout $15 billion as a dividend.  I guess there is an extra $1.5 billion there... let's say they repurchase stock with that.

 

The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio.

 

Don't they need to cut the dividend at this point to rebuild back to 8.5%?

 

That's what I mean by needing to keep the dividend at a level to support the recession scenario.  I believe the Fed would like a substantial amount to be returned via share repurchase, because it's easier to cut when capital rebuilding is needed.

[xazp]

The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio.  >>

 

But their B3 ratio is already at 10%.  And by the time they theoretically get a $15Bn distribution, it wouldn't be surprising if they were at an 11% B3 (even though in 2014 they may well generate over $20Bn in capital, I'm dubious they'll pay out $15Bn).  So, in your example, the 11% drops to 8.5% and they are okay. 

 

The point is, they've been underpaying their dividend from 2010 onward.  Their B3 capital has gone from 6% to 10%, and they've paid essentially nothing out.  They're underpaying now so they can ride through the rough times later, IMO. 

 

 

 

 

You mention a recession as an obstacle.  But, remember the Basel 3 metrics already include a buffer for a recession.  And then a "big bank" surcharge.  And on top of that a BAC (self-imposed) conservative surcharge.  Those buffers are there so that BAC can continue operating "normally" in a recession

 

Let's say their normal earning power is $23 billion (11.5 x $2).  They retain 30% to support future organic growth, and payout $15 billion as a dividend.  I guess there is an extra $1.5 billion there... let's say they repurchase stock with that.

 

The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio.

 

Don't they need to cut the dividend at this point to rebuild back to 8.5%?

 

That's what I mean by needing to keep the dividend at a level to support the recession scenario.  I believe the Fed would like a substantial amount to be returned via share repurchase, because it's easier to cut when capital rebuilding is needed.

[ERICOPOLY]

The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio.  >>

 

But their B3 ratio is already at 10%.  And by the time they theoretically get a $15Bn distribution, it wouldn't be surprising if they were at an 11% B3 (even though in 2014 they may well generate over $20Bn in capital, I'm dubious they'll pay out $15Bn).  So, in your example, the 11% drops to 8.5% and they are okay. 

 

The point is, they've been underpaying their dividend from 2010 onward.  Their B3 capital has gone from 6% to 10%, and they've paid essentially nothing out.  They're underpaying now so they can ride through the rough times later, IMO. 

 

 

 

 

You mention a recession as an obstacle.  But, remember the Basel 3 metrics already include a buffer for a recession.  And then a "big bank" surcharge.  And on top of that a BAC (self-imposed) conservative surcharge.  Those buffers are there so that BAC can continue operating "normally" in a recession

 

Let's say their normal earning power is $23 billion (11.5 x $2).  They retain 30% to support future organic growth, and payout $15 billion as a dividend.  I guess there is an extra $1.5 billion there... let's say they repurchase stock with that.

 

The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio.

 

Don't they need to cut the dividend at this point to rebuild back to 8.5%?

 

That's what I mean by needing to keep the dividend at a level to support the recession scenario.  I believe the Fed would like a substantial amount to be returned via share repurchase, because it's easier to cut when capital rebuilding is needed.

 

Yep... I also thought it was nearly 10%.  But there are apparently different approaches to calculating it.  I'm thinking it's barely over 9%, since that is the "standardized" approach, and I figure standards are standards -- I've seen the bank state it two different ways, with the higher 10% figure and this lower 9% figure.  But without knowing which one is the right one, I'd put my money on the word "standardized":

 

From the Q3 CC:

our estimate of the Basel 3 Tier 1 common ratio on a fully phased-in basis under the standardized approach would be just over 9%

 

So that leaves no "end of Q3" excess to dividend out, because the bank has that self-imposed 50 bps cushion that brings the minimum from 8.5% up to 9%.  Additionally, there's that new leverage ratio that they need to meet at 5%, and they only just barely exceeded it this quarter.  I'm not sure if they can shift things around easily to exceed that ratio.  But on the surface, and given that I'm no expert, it looks to me that being just above 5% sounds like there isn't a dam full of capital to return to shareholders, and same with the 9% ratio that has no room to return more capital if they intend to uphold their statement of keeping a 50 bps cushion.

 

So that leaves them with the incoming earnings from here on out.  It seems based upon their 9% B3 number that they don't have any excess to return yet... but rather as it rolls in.

 

[ERICOPOLY]

So the 10% B3 figure comes from the "advanced approach", where they use internal inputs for credit risk:

 

http://en.wikipedia.org/wiki/Advanced_IRB

 

And the 9% B3 figure comes from the "standard approach", where:  "Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk."

 

http://en.wikipedia.org/wiki/Standardized_approach_(credit_risk)

 

 

So anyways, I'm not sure which one the bank plans on using when they say they want to operate at 9%

 

[fareastwarriors]

Bank of America, Freddie Mac in Talks to Settle Mortgage Dispute

 

Agency Wants Bank to Buy Back More Than $1.4 Billion in Loans

 

 

http://online.wsj.com/news/articles/SB10001424052702303914304579191990504524748?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

Freddie Mac and Bank of America are in settlement talks to resolve disputes over more than $1.4 billion in faulty mortgages Freddie has said Bank of America should have to take back, according to people familiar with the matter.

 

The deal would be the second such agreement between Bank of America and Freddie since 2011. It would largely shield the bank from any future repurchase demands from Freddie stemming from loans sold before 2012. The second-largest U.S. bank by assets is hoping to settle before the end of the year, said one of the people.

 

Terms of the potential settlement couldn't be determined. Bank of America, based in Charlotte, N.C., has reached two such settlements with Freddie's larger sibling, Fannie Mae, FNMA +0.43% since 2011, including one worth $11.6 billion earlier this year.

[nkp007]

Bank of America investors feel like this.

[obtuse_investor]

Bank of America investors feel like this.

 

This too shall pass, boys.

[ERICOPOLY]

There was some confusion as to how much of a hit the balance sheet will take from rising interest rates.

 

I take it a 200 bps rise in rates puts about a $21 billion hole in OCI, because he seems to be suggesting that it takes 3 years to earn it back (using the incremental boosted earnings to fill the hole).  Elsewhere, they suggested roughly $7b per year improvement in earnings from 200bps rise (so if you multiply by 3, you get the $21b estimate).  This is from the Q3 CC:

 

Bruce R. Thompson - CFO: Yeah. I think I want to think we're in the same zip code both on 100 basis point steepening as well as 100 basis point parallel shift in the guidance that we had given, whether it takes us about three years to earn back any impact of OCI, and we're a touch better than that this quarter. And if you look at the supplemental, you will see that the level of debt securities is down modestly, is we're very sensitive to managing that OCI risk.

[FCharlie]

There was some confusion as to how much of a hit the balance sheet will take from rising interest rates.

 

I take it a 200 bps rise in rates puts about a $21 billion hole in OCI, because he seems to be suggesting that it takes 3 years to earn it back (using the incremental boosted earnings to fill the hole).  Elsewhere, they suggested roughly $7b per year improvement in earnings from 200bps rise (so if you multiply by 3, you get the $21b estimate).  This is from the Q3 CC:

 

Bruce R. Thompson - CFO: Yeah. I think I want to think we're in the same zip code both on 100 basis point steepening as well as 100 basis point parallel shift in the guidance that we had given, whether it takes us about three years to earn back any impact of OCI, and we're a touch better than that this quarter. And if you look at the supplemental, you will see that the level of debt securities is down modestly, is we're very sensitive to managing that OCI risk.

 

 

Wouldn't the OCI hit to the balance sheet repair itself as the securities move closer to maturity? I remember Bruce Thompson saying the average duration of the portfolio was a couple of years.... This makes me think that any OCI hit would be temporary, assuming the securities continue to perform and then pay off at maturity.

 

 

[ERICOPOLY]

There was some confusion as to how much of a hit the balance sheet will take from rising interest rates.

 

I take it a 200 bps rise in rates puts about a $21 billion hole in OCI, because he seems to be suggesting that it takes 3 years to earn it back (using the incremental boosted earnings to fill the hole).  Elsewhere, they suggested roughly $7b per year improvement in earnings from 200bps rise (so if you multiply by 3, you get the $21b estimate).  This is from the Q3 CC:

 

Bruce R. Thompson - CFO: Yeah. I think I want to think we're in the same zip code both on 100 basis point steepening as well as 100 basis point parallel shift in the guidance that we had given, whether it takes us about three years to earn back any impact of OCI, and we're a touch better than that this quarter. And if you look at the supplemental, you will see that the level of debt securities is down modestly, is we're very sensitive to managing that OCI risk.

 

 

Wouldn't the OCI hit to the balance sheet repair itself as the securities move closer to maturity? I remember Bruce Thompson saying the average duration of the portfolio was a couple of years.... This makes me think that any OCI hit would be temporary, assuming the securities continue to perform and then pay off at maturity.

 

You can either look at the OCI hit as repairing itself through maturities, or you can look at the increased NIM on the repriced portfolio and watching it pay off the OCI.  I think it's like looking at the same thing from different points of view.

[ERICOPOLY]

So we're finally getting to the end of 2013 -- another year of obscured earnings power and the stock still trading low.  Good riddance.

 

A few analyst EPS consensus forecasts:

2014  $1.33  (20 analysts)

2015  $1.59  (11 analysts)

2016  $1.81  (2 analysts)

 

On a pre-tax basis at 30% tax rate (as long as the DTA lasts) it translates to this:

 

2014    $1.90 

2015    $2.27

2016  $2.58 

 

So the stock today is effectively stuck around a P/E of 7. 

 

But if you put a P/E of 12x on any of those earnings, you get at least $22.80 on the stock.

 

So the current discount is $8.40 per share, or $96.6 billion on 11.5b fully diluted shares.

 

So that's practically $100 billion dollar discount.

 

Market bubble?  Froth?  This is no latte cart or hot dog stand.

 

EDIT:  It's roughly $140 billion pre-tax discount (at 30% tax rate).  So you could say the stock is discounted for some elevated legal costs, but really?  $140 billion for that?

[bmichaud]

It's a shame adults are not in charge and buying back copious amounts of stock, as is/has going/gone on over at AIG, while the stock is still discounted.

 

BB's grand vision of $2 eps growing exponentially due to buybacks isn't even close to playing out, at least as of yet.

[ERICOPOLY]

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

 

 

[hyten1]

fyi at around 40 min someone ask what is the biggest obstacle to getting to 1% ROA and 14% return

 

brian basically said cost (legal, las etc.)

 

 

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

[ourkid8]

Eric, What I love about you is the fact you are clearly point out that BAC is an absolute screaming buy without telling us directly.  Are you still 100% in BAC and waiting for this coiled spring to take off to the $20-25 range? 

 

Tks,

S

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

[ERICOPOLY]

Eric, What I love about you is the fact you are clearly point out that BAC is an absolute screaming buy without telling us directly.  Are you still 100% in BAC and waiting for this coiled spring to take off to the $20-25 range? 

 

Tks,

S

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

 

Yes I'm still fully invested in it.  It's getting easier to hold for me, even though the price has risen.  They are better able to withstand whatever storm comes... compared to two years ago.  I keep thinking this was just super easy money, but partly it's because an asteroid the size of Texas didn't hit the Earth... I mean, hindsight bias is a tricky thing.

[ourkid8]

What is your ratio of Options / Common shares?  I still hold a substantial amount of Warrants and i know they have gone no where based on the wonderful logic you provided us.  I was stubborn and stupid to act. 

 

Tks,

S

 

Eric, What I love about you is the fact you are clearly point out that BAC is an absolute screaming buy without telling us directly.  Are you still 100% in BAC and waiting for this coiled spring to take off to the $20-25 range? 

 

Tks,

S

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

 

Yes I'm still fully invested in it.  It's getting easier to hold for me, even though the price has risen.  They are better able to withstand whatever storm comes... compared to two years ago.  I keep thinking this was just super easy money, but partly it's because an asteroid the size of Texas didn't hit the Earth... I mean, hindsight bias is a tricky thing.

[xazp]

Didn't he say an approximation of this two years ago, during the investor conference?  Meaning, are these sorts of financial targets always "a couple of years away?"

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

[OracleofCarolina]

http://m.us.wsj.com/articles/BL-MBB-11644

 

Mike Mayo still hates BAC

[wescobrk]

"Didn't he say an approximation of this two years ago, during the investor conference?  Meaning, are these sorts of financial targets always "a couple of years away?"

 

He did but he qualified it with that he needs a normalized fed funds rate.

[xazp]

If Moynihan believed what he is saying, he'd be personally buying stock hand over fist, and he'd have BAC itself repurchasing tons of stock, and he'd never have issued $#%% stock to Buffett in single-digit prices. 

 

He may be right, but his actions don't suggest he has a ton of conviction with it.

 

 

 

"Didn't he say an approximation of this two years ago, during the investor conference?  Meaning, are these sorts of financial targets always "a couple of years away?"

 

He did but he qualified it with that he needs a normalized fed funds rate.

[ERICOPOLY]

Didn't he say an approximation of this two years ago, during the investor conference?  Meaning, are these sorts of financial targets always "a couple of years away?"

 

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years.

 

It's at the 37 minute mark of today's webcast:

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

 

He is still consistent with what he said two years ago (late 2011) -- New BAC will be done by mid-2015.  And he's given a similar timeline for all the costs to come out of LAS.  Which is roughly two years (from today)... a bit less.  So this cleanup is happening roughly on the timeline he promised.

[fareastwarriors]

http://m.us.wsj.com/articles/BL-MBB-11644

 

Mike Mayo still hates BAC

 

 

Here is Mayo's Report. GO!

Mayo_CLSA.pdf