BAC-WT - Bank of America Warrants

[ERICOPOLY]

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

 

Mike Mayo still hates BAC

 

 

Here is Mayo's Report. GO!

 

The report is stating a falsehood.  Mayo claims the 14% ROTE metric only came up today in response to a question.

 

He is wrong!

[morningstar]

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.

 

 

BAC appears to be buying back stock at pretty much the rate allowed in the CCAR authorization, at about 2 bn of 5 bn spent halfway through the period. Especially when you consider that near-term economic forecasts and macro environment uncertainty (rates) have probably increased since the last CCAR process - Fed would probably want to see additional caution. It would not pay to put the pedal to the metal in 2013 if that means reduced capital distributions in 2014, 15, 16... because the regulator sees you as reckless.

[wescobrk]

"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"

 

My response was from memory from the Bruce berkowitz interview.

Feel free to check but I'm pretty confident he said that.

I think that interview was before new bac so both our statements are correct.

[ERICOPOLY]

I read his full report.  I am shocked by this guy.  He states that his $12 price target is arrived at by taking the average of dividend discount method, P/E, price-to-book, PEG ratio analysis, and sum of the parts for both PE and PB. 

 

That's some pretty deep analysis!

[ERICOPOLY]

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.

 

 

BAC appears to be buying back stock at pretty much the rate allowed in the CCAR authorization, at about 2 bn of 5 bn spent halfway through the period. Especially when you consider that near-term economic forecasts and macro environment uncertainty (rates) have probably increased since the last CCAR process - Fed would probably want to see additional caution. It would not pay to put the pedal to the metal in 2013 if that means reduced capital distributions in 2014, 15, 16... because the regulator sees you as reckless.

 

They also only just barely clear 9% B3 (standardized method) and 5% minimum on that new leverage ratio.  They are years ahead of schedule, but demonstrates good behavior and the clients/counterparties likely want to hear it.

 

It probably isn't a coincidence that they hit those metrics before buying back more shares.  It gets them to those levels going into the next CCAR process.  So have the ratios met by end of Q3 (check!), then complete the $3b of buybacks out of new capital generated during next 6 moths.

 

So one theory is that by hitting those two metrics (which they couldn't have done if they'd spend $3b extra on buybacks) they are trying to make a stronger case for their next capital return request.

[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?"

 

Bruce R. Berkowitz - Managing Member, Fairholme Capital Management: In regards to profitability, looking at the balance sheet, taking another view, is it possible for the bank over an entire business cycle to average a 1% return on assets and a 10% return on equity?

Brian T. Moynihan - CEO, Bank of America Corporation: So, I think, Bruce, the way we've had this is – concern by investors and it's a rightful concern. If you go all the way out to where Basel III gets you with a full SIFI buffer and all the different things to 9.5%, can you earn enough return on equity to make this business make sense, and I think, a lot of this has by sheer mass we – I thought that we'd be sort of an 8% capital level, because of where we thought the SIFI buffer with other things would come out on the Tier 1 Basel III. It's now going to be 9.5%. So, we lost some of the returns, so we said low teens there. We're probably closer to what you just spoke about in terms of target. The 1% ROA is a reasonable target for this balance sheet. It will take, as I said before, a little more net interest margin help based on a reasonable yield curve with the front end ratio – the front-end fed reserve, fed funds type of number, 1.25, 1.5 to get there as we spoke about, but I think we're comfortable, we'll get there given the normal business cycle, and I think that we will be fine tuning the balance sheet actually to achieve that as we continue to look at, because if we don't achieve those returns, then we'll (slice) businesses and fine tune the balance sheet to get there, we're not going to get investors to invest in this industry.

 

Here is the link

http://www.morningstar.com/earnings/29142126-bank-of-america-corporation-q2-2011.aspx?pindex=17

 

 

[fareastwarriors]

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

 

Mike Mayo still hates BAC

 

 

Here is Mayo's Report. GO!

 

 

I actually hopes he still has some sway with the "smart money" so the price can go lower. I would love to buy more at lower prices.

[onyx1]

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

 

Mike Mayo still hates BAC

 

 

Here is Mayo's Report. GO!

 

 

I actually hopes he still has some sway with the "smart money" so the price can go lower. I would love to buy more at lower prices.

 

Mayo Stands by His Y2K Warning on Banks, May 1999:

 

http://www.thestreet.com/story/767544/1/mayo-stands-by-his-y2k-warning-on-banks.html

[nsa122]

I have many here to thank for bringing BAC to my attention in 2011...I feel obligated to share my (probably unpopular) opinion; I personally don't see any discount, much less a $140 billion one.  I calculate a P/E of 19 (0.75 cents trailing twelve months) rather than 7.  Quite a bit of earnings improvement already seems implicit in the current price.

[ERICOPOLY]

I have many here to thank for bringing BAC to my attention in 2011...I feel obligated to share my (probably unpopular) opinion; I personally don't see any discount, much less a $140 billion one.  I calculate a P/E of 19 (0.75 cents trailing twelve months) rather than 7.  Quite a bit of earnings improvement already seems implicit in the current price.

 

 

Investing however is not about buying the stock today in order to earn yesteryear's income.  And I know that you know that.

[xazp]

My recollection of this interview is he also said "no need to raise capital."  And then promptly handed Buffett a whole lot of shares. 

 

He wouldn't need to buy back nearly as many shares if he hadn't given Buffett a chest full of them. 

 

To me, this capital allocation mistake is worth anything good he might have done.  To me, he's pretty mediocre. 

 

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?"

 

Bruce R. Berkowitz - Managing Member, Fairholme Capital Management: In regards to profitability, looking at the balance sheet, taking another view, is it possible for the bank over an entire business cycle to average a 1% return on assets and a 10% return on equity?

Brian T. Moynihan - CEO, Bank of America Corporation: So, I think, Bruce, the way we've had this is – concern by investors and it's a rightful concern. If you go all the way out to where Basel III gets you with a full SIFI buffer and all the different things to 9.5%, can you earn enough return on equity to make this business make sense, and I think, a lot of this has by sheer mass we – I thought that we'd be sort of an 8% capital level, because of where we thought the SIFI buffer with other things would come out on the Tier 1 Basel III. It's now going to be 9.5%. So, we lost some of the returns, so we said low teens there. We're probably closer to what you just spoke about in terms of target. The 1% ROA is a reasonable target for this balance sheet. It will take, as I said before, a little more net interest margin help based on a reasonable yield curve with the front end ratio – the front-end fed reserve, fed funds type of number, 1.25, 1.5 to get there as we spoke about, but I think we're comfortable, we'll get there given the normal business cycle, and I think that we will be fine tuning the balance sheet actually to achieve that as we continue to look at, because if we don't achieve those returns, then we'll (slice) businesses and fine tune the balance sheet to get there, we're not going to get investors to invest in this industry.

 

Here is the link

http://www.morningstar.com/earnings/29142126-bank-of-america-corporation-q2-2011.aspx?pindex=17

[no_free_lunch]

nsa,

 

If you go back through BAC earnings, back to the mid 90's at least, their ROA is pretty consistently between 0.9 and 1.5.  Even during recessions it would just down to the 0.9-1.0 range.  So even at the low end of that range, with $2.2T assets that would imply $19.8B in earnings.  I don't think banking has fundamentally changed and other banks, JPM/WFC/USB are getting these types of returns so it seems doable.  It is just a question of how long to work their way through current abnormally high expenses.

[ERICOPOLY]

I went through the 10-Q and I couldn't find the outstanding long term debt maturities and interest rates.

 

But BAC has stated that $40b is expiring next year, and they intend to roll less than 1/2 of it.

 

So that means more than $20b won't be replaced.  I looked at bond being traded, and saw some expiring next year that have coupons all north of 5%, but not by much (although one issue expiring is 7%).  And I saw other financials issuing 7 year bonds at around 3% (new issues), or 5% for 20 year maturities.

 

So assuming they roll $20b at 3% for 7 years, then they pick up at least 200bps on the 20b being rolled, and they pick up at least 500 bps on the 20b (at minimum) maturing. pre-tax.

 

So roughly $1.4 billion annual benefit from maturing LT debt next year (before tax).

 

 

[xazp]

The ROAs you see are partially a function of made-up earnings.  BAC didn't "lose" billions of dollars in 2009 - that money was lost in 2004-2008 when they (and CFC in particular) were issuing poorly-risked mortgages.  It's just that they reported fake profits, and in 2009, they had to take real losses to reconcile with reality.  All of the litigation expenses and regulatory crackdowns today, really represent fake profits booked in the past, which are being offset by losses today. 

 

I think the banking industry has fundamentally changed.  Leverage is down a lot from those periods.  Regulations are much tighter.  Acquisitions in the big-banking world are basically impossible.  IMO these changes are for the better.  I would love the next time a banker thinks a no-doc loan is a good idea, for a regulator to say NO NO NO.  See the problem is, that no-doc loan is probably good for the banker in the short-term, but ultimately bad for the bank. 

 

My feeling is that ROE's in particular can not get back to former highs (a function of much stricter capital ratios) but at the same time, banks themselves are much safer.  If they earn less but trade at broader market P/E's - that's good enough for me. 

 

 

 

 

 

 

 

nsa,

 

If you go back through BAC earnings, back to the mid 90's at least, their ROA is pretty consistently between 0.9 and 1.5.  Even during recessions it would just down to the 0.9-1.0 range.  So even at the low end of that range, with $2.2T assets that would imply $19.8B in earnings.  I don't think banking has fundamentally changed and other banks, JPM/WFC/USB are getting these types of returns so it seems doable.  It is just a question of how long to work their way through current abnormally high expenses.

[no_free_lunch]

xazp,

 

Even in the early 2000's and the late 90's, before anyone had heard of subprime / no-doc mortgages they were getting ROAs in the low 1% range.  The numbers were actually frequently higher in that timeframe than mid 2000's.  So I am not just pulling the numbers from their prime earnings period.  Even in 2002-2003 which was a rough period economically I think it was around 0.9 ROA.

 

I think that by looking at return on assets rather than equity I am removing the impact from leverage.  I mean the $2.2T is what they earn on, right?  Whether there is $200B equity or $50B, the $2.2T is the driver.  If anything, with higher relative equity (or lower leverage if you prefer) there should be incrementally greater earnings on a given amount of assets as there will be less interest payments.

 

I don't know, I am no banking analyst but just my 50,000 ft view of things.

[ERICOPOLY]

Last year when the bank said they were meeting B3 requirements, I believed it was a signal that they could return all future capital generated.

 

This year, in Q3, once again they crossed the 9% B3 threshold, calculated by a different method (using 3rd party ratings instead of in-house ratings).  I think the 3rd party ratings are going to be more politically saleable, and that will be the method they live by and it will be important to show this number to the world.

 

So... false start last year.  But this year the same statement just needs a reboot.  They are now apparently meeting all of the requirements laid out for them, and seemingly can now return everything they generate... once they get approval to do so.

I think that's why there was such a lame request for capital return last year.

 

EDIT:  In other words, they still had to build capital but just wouldn't admit it openly.

[xazp]

Not all assets are the same, though.  In general, riskier assets pay out more.  Deposit money at the Federal Reserve you get 0.25%.  Lend money to your drunk uncle, 12%. 

 

The Basel 3 rules weigh assets in such a way that the riskiness of the asset / yield of the asset relates back to capital.  You can have a lot more assets parked at the Fed than HELOCs.  Owning private equity is frowned upon.  So the stuff "in" that $2.2 trillion in assets is being bent towards less risk / yield. 

 

I do agree they can hit an ROA of 1% and/or $20Bn in earnings.  I wasn't disputing that.  It's also a bit confusing because new BAC includes a lot of businesses that don't necessarily require heavy capital to run (for example, the wealth management portions of ML).  That's true for the other banks you mention too, so I'm not even sure how to think of ROA when some of their businesses aren't really being "funded" the way a traditional spread business is. 

 

 

 

 

xazp,

 

Even in the early 2000's and the late 90's, before anyone had heard of subprime / no-doc mortgages they were getting ROAs in the low 1% range.  The numbers were actually frequently higher in that timeframe than mid 2000's.  So I am not just pulling the numbers from their prime earnings period.  Even in 2002-2003 which was a rough period economically I think it was around 0.9 ROA.

 

I think that by looking at return on assets rather than equity I am removing the impact from leverage.  I mean the $2.2T is what they earn on, right?  Whether there is $200B equity or $50B, the $2.2T is the driver.  If anything, with higher relative equity (or lower leverage if you prefer) there should be incrementally greater earnings on a given amount of assets as there will be less interest payments.

 

I don't know, I am no banking analyst but just my 50,000 ft view of things.

[ERICOPOLY]

I have many here to thank for bringing BAC to my attention in 2011...I feel obligated to share my (probably unpopular) opinion; I personally don't see any discount, much less a $140 billion one.  I calculate a P/E of 19 (0.75 cents trailing twelve months) rather than 7.  Quite a bit of earnings improvement already seems implicit in the current price.

 

Actually, to clarify a point.  I've never seen anyone mention that it is trading for a $140 billion discount.  You are overstating my estimate of a $100b discount by 40%, and I think you are confused by when I said the legal issues won't be $140b.  That was a pre-tax number, because so far the legal issues have all been pre-tax expenses.

 

Take the estimate for next year of 20 analysts -- they think it will be $1.33 per share.  But that's after-tax.  Pre-tax, it's $1.90.  And at 12x earnings, it's $22.80 per share.  Due to the DTA, they get to keep the would-be tax payments (until all used up).  The idea being that by the time the DTA is used up, they're through all the expenses and are earning $2 per share after tax.

 

So, in the meantime, while they are working towards this $2 per share after-tax number in a couple of years, they make roughly $2 pre-tax that they get to keep, minus the temporarily high pre-tax expenses.  But the pre-tax expenses won't amount to $140 billion. 

 

Last year's expense levels don't matter anymore, and that's where you are getting your P/E of 19 from.  It isn't relevant because your returns are based on what happens going forward.

 

EDIT:  And so once you hit $2, in two or three years, you have $24 share price at 12x earnings... in addition to the accumulated earnings between now and then.  So that's possibly $28-$30 in three years, which is a double of course.

[xazp]

When I did my presentation on BAC, BAC was at $7.76, and Mayo had a sell on it.  So I presume his old target was I dunno $8 or less.  So his price target has come up by 50%+. 

 

Incidentally when I gave that presentation, I talked about Mayo.  A guy interrupted my talk:  "Do you know who Mike Mayo IS?  He is one of the most respected bank analysts."  It was kind of rude because it was the beginning of the presentation. 

 

Glad to see Mayo's price target has come up 50%. 

 

 

 

 

 

I read his full report.  I am shocked by this guy.  He states that his $12 price target is arrived at by taking the average of dividend discount method, P/E, price-to-book, PEG ratio analysis, and sum of the parts for both PE and PB. 

 

That's some pretty deep analysis!

[ERICOPOLY]

When I did my presentation on BAC, BAC was at $7.76, and Mayo had a sell on it.  So I presume his old target was I dunno $8 or less.  So his price target has come up by 50%+. 

 

Incidentally when I gave that presentation, I talked about Mayo.  A guy interrupted my talk:  "Do you know who Mike Mayo IS?  He is one of the most respected bank analysts."  It was kind of rude because it was the beginning of the presentation. 

 

Glad to see Mayo's price target has come up 50%. 

 

 

 

 

 

I read his full report.  I am shocked by this guy.  He states that his $12 price target is arrived at by taking the average of dividend discount method, P/E, price-to-book, PEG ratio analysis, and sum of the parts for both PE and PB. 

 

That's some pretty deep analysis!

 

That same year, in March 2013 2011, Mayo said BAC had $2 per share of core earnings power.

 

Hold the Mayo.

[xazp]

Yes, my whole presentation was that you could use a "sell rated analyst" - Mayo - and produce some pretty spectacular results. 

 

In 2012, I have him predicting 2014 earnings of $1.20, and a 2014 dividend of 85c/share.  So at a P/E of 10 or a earnings yield of 5%, you'd be valuing the stock at $12-$17. 

 

His forward estimates are fine (actually his dividend estimate looks high), but what seems really weird was those set of numbers combined with his price target (unfortunately I didn't write it down, but I believe it was in the single digits). 

 

 

 

When I did my presentation on BAC, BAC was at $7.76, and Mayo had a sell on it.  So I presume his old target was I dunno $8 or less.  So his price target has come up by 50%+. 

 

Incidentally when I gave that presentation, I talked about Mayo.  A guy interrupted my talk:  "Do you know who Mike Mayo IS?  He is one of the most respected bank analysts."  It was kind of rude because it was the beginning of the presentation. 

 

Glad to see Mayo's price target has come up 50%. 

 

 

 

 

 

I read his full report.  I am shocked by this guy.  He states that his $12 price target is arrived at by taking the average of dividend discount method, P/E, price-to-book, PEG ratio analysis, and sum of the parts for both PE and PB. 

 

That's some pretty deep analysis!

 

That same year, in March 2013 2011, Mayo said BAC had $2 per share of core earnings power.

 

Hold the Mayo.

[ERICOPOLY]

Cynically, I believe Mayo's report was motivated by a trader who wanted to see how resilient the stock is to a change in sentiment.  No meaningful reaction would be his "buy" signal.  The stock being down two pennies this morning would seem to be a reasonable signal that comments from analysts aren't going to talk the price down.  So ironically even a bullish investor could find a report like that very valuable.

[ERICOPOLY]

What is your ratio of Options / Common shares?

 

I have only common shares+puts in taxable holdings, and have a mix of common and calls in my non-taxable account.

 

I won't tell any more because I'm still trying to accumulate and don't want to move the market and further.  Damn this thing is illiquid!

[onyx1]

 

I won't tell any more because I'm still trying to accumulate and don't want to move the market and further.  Damn this thing is illiquid!

 

^  LOL

[rkbabang]

What is your ratio of Options / Common shares?

 

I have only common shares+puts in taxable holdings, and have a mix of common and calls in my non-taxable account.

 

I won't tell any more because I'm still trying to accumulate and don't want to move the market and further.  Damn this thing is illiquid!

 

If you're still 100% BAC and you are still trying to accumulate, I take that to mean you hold a certain amount of cash in your portfolio.  What % is in cash? And how low do you anticipate letting your cash percentage get once you are all-in?

 

EDIT:  On 2nd thought, you could be holding no cash and be continuing to buy on margin.