BAC-WT - Bank of America Warrants

[ourkid8]

We all know there is a greater power outside BAC who is preventing this, lets not be naive.  BAC was probably warned that the $5B share repurchase program HAS to be completed evenly over the year. 

 

Tks,

S

 

Through 4Q, they have repurchased $3.2B of common at an average price of $13.90 (232m shares). Period end shares outstanding is 10.59B versus 10.78B one year ago. Diluted shares are up quite a bit YoY, however. I have to agree with Al about trading some tax efficiency for the discipline of the dividend.

 

The 5% dilution every year makes me sad. Pay your employees more, don't give away cheap stock options that don't incentivize properly.

 

agreed, horrible.

 

I do not understand why companies refuse to use their authorized buybacks.  That has been the most disappointing part of this whole thesis/playout.

[ERICOPOLY]

We all know there is a greater power outside BAC who is preventing this, lets not be naive.  BAC was probably warned that the $5B share repurchase program HAS to be completed evenly over the year. 

 

Tks,

S

 

Through 4Q, they have repurchased $3.2B of common at an average price of $13.90 (232m shares). Period end shares outstanding is 10.59B versus 10.78B one year ago. Diluted shares are up quite a bit YoY, however. I have to agree with Al about trading some tax efficiency for the discipline of the dividend.

 

The 5% dilution every year makes me sad. Pay your employees more, don't give away cheap stock options that don't incentivize properly.

 

agreed, horrible.

 

I do not understand why companies refuse to use their authorized buybacks.  That has been the most disappointing part of this whole thesis/playout.

 

I'm pretty sure there isn't much question about that.

 

The reason: 

1)  buybacks are to be cancelled in face of mounting losses

2)  "You say you executed the entire buyback on day 1?  Well I suppose then it can't be cancelled"

 

Furthermore, this is why the Fed prefers buybacks over dividends, and this is why (you people  ;)) need to stop hoping that they are going to return all capital as dividends in some effort to pump up the stock

[racemize]

even so, with an even distribution, they should be at 3.75 not 3.2, right?  I wonder if they even buy the full 5 in Q4.

 

Maybe so the stress test looks a bit better?  Back load the buybacks since the last quarter isn't used for stress?

[ourkid8]

Yup but management's initial focus was on retiring the high yielding preferred stock so they did start repurchasing shares a bit late.  My preference would have been for them to execute the full $5B in share repurchases under TBV but it was not to be.

 

Tks,

S

 

even so, with an even distribution, they should be at 3.75 not 3.2, right?  I wonder if they even buy the full 5 in Q4.

 

Maybe so the stress test looks a bit better?  Back load the buybacks since the last quarter isn't used for stress?

[ERICOPOLY]

even so, with an even distribution, they should be at 3.75 not 3.2, right?  I wonder if they even buy the full 5 in Q4.

 

Maybe so the stress test looks a bit better?  Back load the buybacks since the last quarter isn't used for stress?

 

True, but we expect the capital return to increase in 2014, and 2015 over 2013 levels.

 

So if you want consistency, it will need to have steps in it.

 

Perhaps the even distribution is fitting the following pattern:

 

$1.8b Q1 2014

$1.8b Q2 2014

$1.8b Q3 2014

$2.3b Q1 2015

$2.3b Q2 2015

$2.3b Q3 2015

 

 

So far they are not violating this pattern.  (yes, dry humor)

[ourkid8]

Eric, that looks about right factoring in management will continue to retire high yielding preferred stock along with adding a dividend.

 

Tks,

S

 

even so, with an even distribution, they should be at 3.75 not 3.2, right?  I wonder if they even buy the full 5 in Q4.

 

Maybe so the stress test looks a bit better?  Back load the buybacks since the last quarter isn't used for stress?

 

True, but we expect the capital return to increase in 2014, and 2015 over 2013 levels.

 

So if you want consistency, it will need to have steps in it.

 

Perhaps the even distribution is fitting the following pattern:

 

$1.8b Q1 2014

$1.8b Q2 2014

$1.8b Q3 2014

$2.3b Q1 2015

$2.3b Q2 2015

$2.3b Q3 2015

 

 

So far they are not violating this pattern.  (yes, dry humor)

[ourkid8]

Please see Bruce's comments below.  I would love to see 1% roa and 14% ROE but not over the course of 3 years.  We need to get there sooner!!!

 

Tks,

S

 

Chief Financial Officer Bruce Thompson reiterated the bank would like to boost its return on average assets to 1% (from 0.53% in 2013) and the return on tangible common equity to 14% (about 7% in 2013), and again put a time on it. “Those are the types of levels that we see ourselves looking to achieve over the course of the next three years,” Thompson said.

 

 

[jay21]

Please see Bruce's comments below.  I would love to see 1% roa and 14% ROE but not over the course of 3 years.  We need to get there sooner!!!

 

Tks,

S

 

Chief Financial Officer Bruce Thompson reiterated the bank would like to boost its return on average assets to 1% (from 0.53% in 2013) and the return on tangible common equity to 14% (about 7% in 2013), and again put a time on it. “Those are the types of levels that we see ourselves looking to achieve over the course of the next three years,” Thompson said.

 

At first I agreed with you.  But then I could also kinda read it as "We are earning 1% RoA over these next three years," which include this upcoming year.

[thomcapital]

Please see Bruce's comments below.  I would love to see 1% roa and 14% ROE but not over the course of 3 years.  We need to get there sooner!!!

 

Tks,

S

 

Chief Financial Officer Bruce Thompson reiterated the bank would like to boost its return on average assets to 1% (from 0.53% in 2013) and the return on tangible common equity to 14% (about 7% in 2013), and again put a time on it. “Those are the types of levels that we see ourselves looking to achieve over the course of the next three years,” Thompson said.

 

At first I agreed with you.  But then I could also kinda read it as "We are earning 1% RoA over these next three years," which include this upcoming year.

 

A little later this was addressed by Mike Mayo...

 

<Q - Mike L. Mayo>: And then lastly, you mentioned the goal for an ROA of 1% over three years, and I just want to understand what you mean by that. Do you mean at the end of 2016 going into 2017, you look to have an ROA of 1%? Or do you mean the average over these three years?

 

<A - Bruce R. Thompson>: No. See, what we're referencing is that at the end of it as we look out over three years, at the end of the third year, that's where we would look to get to which, given our current leverage profile, is around 14% on tangible common.

 

<Q - Mike L. Mayo>: Okay. So at the end of 2016 you look to have an ROA of 1%.

 

<A - Bruce R. Thompson>: That's correct.

 

[Pauly]

I'm sure internally they're aiming for a shorter timespan to achieve those numbers but don't want to risk disappointment if they miss a more aggressive date.

 

I also just want to thank everyone involved with this thread for the mountains of great information/opinions put forward. I only wish I had joined this board earlier (like when BAC was less than 0.5 book value).

[jay21]

Please see Bruce's comments below.  I would love to see 1% roa and 14% ROE but not over the course of 3 years.  We need to get there sooner!!!

 

Tks,

S

 

Chief Financial Officer Bruce Thompson reiterated the bank would like to boost its return on average assets to 1% (from 0.53% in 2013) and the return on tangible common equity to 14% (about 7% in 2013), and again put a time on it. “Those are the types of levels that we see ourselves looking to achieve over the course of the next three years,” Thompson said.

 

At first I agreed with you.  But then I could also kinda read it as "We are earning 1% RoA over these next three years," which include this upcoming year.

 

A little later this was addressed by Mike Mayo...

 

<Q - Mike L. Mayo>: And then lastly, you mentioned the goal for an ROA of 1% over three years, and I just want to understand what you mean by that. Do you mean at the end of 2016 going into 2017, you look to have an ROA of 1%? Or do you mean the average over these three years?

 

<A - Bruce R. Thompson>: No. See, what we're referencing is that at the end of it as we look out over three years, at the end of the third year, that's where we would look to get to which, given our current leverage profile, is around 14% on tangible common.

 

<Q - Mike L. Mayo>: Okay. So at the end of 2016 you look to have an ROA of 1%.

 

<A - Bruce R. Thompson>: That's correct.

 

Thanks for the clarification.

 

I think they can smash that assuming legacy and legal costs are wound down.

[fareastwarriors]

http://dealbook.nytimes.com/2014/01/15/skeptics-question-banks-bottom-lines/

 

Skeptics Question Banks’ Bottom Lines

[fareastwarriors]

Bank of America's High-Class Problem

 

 

http://online.wsj.com/news/articles/SB10001424052702304419104579322814126781636?mod=WSJ_Heard_LeadStory

 

 

Bank of America chief Brian Moynihan can live with problems like this: Less than three years after investors practically left his bank for dead, they now may be too excited by its prospects.

 

Their enthusiasm was fanned by BofA's fourth-quarter report Wednesday. Net income of $3.4 billion was up nearly 40% from the prior quarter and was nearly five times the level of a year earlier, when the bank was dogged by a number of financial charges.

 

Although BofA had to take another $2.3 billion hit this past quarter for litigation expense, bringing the full-year total to $6.1 billion, its businesses performed well. And while the bank benefited from $1.2 billion in releases from loan reserves, this also reflected continued improvement in credit quality. Plus, it came as the bank added $400 million to reserves in its commercial-banking business, reflecting 16% growth in lending from a year earlier.

 

What really caught investors' attention, though, were new targets the bank set: a 1% return on assets by the end of 2016, which would translate into a return of about 14% on average tangible common equity. That compares with a return on assets of just 0.53% in 2013 and a return on tangible equity of just under 7%.

 

To get there, the bank needs to continue whacking expenses. This will come about through a combination of ongoing efficiency initiatives, a reduction in the cost of servicing legacy, problem mortgages and what it hopes will be a steep drop in litigation expense. At the same time, BofA expects to see some benefit from short-term interest rates starting to rise in 2015.

 

Back-of-the-envelope calculations, which assume slight balance-sheet growth and leverage staying constant, suggest that those targets, if met, could lead the bank to earn about $1.90 a share in 2016, more than double 2013's level. Apply a multiple of 10.7 times—BofA's average over the seven years prior to the financial crisis—and the stock would be worth about $20.30 a share.

 

Discount that price by, say, 15%, to reflect execution, time and legal risks, and the value would be about $17.25 a share—about where the stock was already trading Wednesday.

 

Granted, such an estimate doesn't account for any potential share buybacks. Nor does it reflect the possibility the Fed could take action earlier on short-term rates. BofA finance chief Bruce Thompson noted Wednesday that a one-percentage-point upward shift of in rates would lead to a gain of about $3.2 billion in net interest income. The bulk of that would result from rising short-term rates, which haven't been affected by the Fed's plan to dial back stimulus efforts.

 

Still, as Nancy Bush of NAB Research said on BofA's earnings call, there seems to be a market perception that BofA will see a sharp, quick gain as soon as rates go up. More likely is that it feeds through over time, while there is still some risk the Fed keeps rates near zero longer despite its expectation of raising them in 2015.

 

The result is that while BofA may have reached an operational inflection point, market expectations are setting perhaps too high a bar for Mr. Moynihan. Then again, that beats having to convince investors you can stay in business.

[nkp007]

System error.

 

The number of nice things said about Bank of America in one day has exceeded the limit.

 

Please reboot.

 

 

[Rabbitisrich]

 

Bank of America's High-Class Problem

 

 

http://online.wsj.com/news/articles/SB10001424052702304419104579322814126781636?mod=WSJ_Heard_LeadStory

 

 

 

Still, as Nancy Bush of NAB Research said on BofA's earnings call, there seems to be a market perception that BofA will see a sharp, quick gain as soon as rates go up. More likely is that it feeds through over time, while there is still some risk the Fed keeps rates near zero longer despite its expectation of raising them in 2015.

 

 

 

That phrasing sort of makes it look like the Fed rate policy is why BAC earnings aren't rising. That seems to be an interpretation Moynihan and co. encourage, as opposed to blaming the giant hole where Countrywide's back office was supposed to be, and management's struggle to fill it.

[fareastwarriors]

Bank of America: the road ahead

 

How much will the remaining litigation cost and when will it move into the rear view mirror?

 

 

http://www.ft.com/intl/cms/s/3/18882ae2-7e08-11e3-95dd-00144feabdc0.html?siteedition=intl#axzz2qIcZZaE0

 

 

 

 

The financial crisis continues to recede into the distance for Bank of America. Its net income surged in the fourth quarter to $3.4bn from just $732m a year ago. A low tax rate helped, but the bank – which exited the crisis deeply troubled – is reaping the benefits of an improving credit picture now.

 

Net charge-offs (credit losses on residential mortgages, credit cards and other loans) dropped nearly in half in the quarter and the bank released $1.2bn of loss reserves. But litigation over practices in the run-up to the crisis remain on the road ahead for BofA. Legal costs jumped to $2.3bn in the quarter versus $916m a year ago as the bank prepares to deal with mortgage-related litigation.

 

Even beyond the crisis-related give and take in the quarter, the bank posted good results. Its global banking business had record revenue. Investment banking fees, for example, increased 9 per cent year on year versus a 3 per cent decline at rival JPMorgan. At the global wealth management business, which includes Merrill Lynch and US Trust, client balances increased 10 per cent year on year to $2.4tn and the pre-tax margin jumped to a hefty 27 per cent from 21 per cent.

 

But investors have anticipated the recovery at BofA. The stock has rallied about 50 per cent over the past year. And it trades at 13 times 2014 forecasts compared with roughly 10 times for both Citigroup and JPMorgan. That valuation means that the key for future gains will be the level of earnings growth. There is optimism about an accelerating US economy and higher interest rates boosting revenue and margins at banks, but that scenario has yet to play out. And BofA, like many of its competitors, has a cost savings plan, though it needs to execute it. The other piece is litigation: how much will the remaining litigation cost and when will it move into the bank’s rear view mirror.

 

 

 

[fareastwarriors]

http://dealbook.nytimes.com/2014/01/16/banks-keep-their-mortgage-litigation-reserves-a-secret/?ref=business

 

 

Banks Keep Their Mortgage Litigation Reserves a Secret

[portfoolio]

Judge on BofA $8.5 bln settlement case is promoted

http://www.reuters.com/article/2014/01/17/bankofamerica-settlement-idUSL2N0KR1KW20140117?feedType=RSS&feedName=marketsNews

 

4 new NY appeals judges; 1 is mortgage case jurist

http://www.centredaily.com/2014/01/17/3990654/4-new-ny-appeals-judges-1-is-mortgage.html

 

Kapnick's appointment takes effect Feb. 3. Appellate judges can finish ongoing trial-court cases, but many aim to conclude their cases before taking their new posts.

[PJM]

Thanks everyone for the great inputs on this forum. In 2013 BAC hit the expected earnings and everyone made a fortune.

 

Now Going into 2014 and beyond,

 

1. What do you expect to be the earnings, ROE and TBV in 2015, 2016 and beyond?

2. Would you buy the stock and/or options/leaps?

3. What are the key headwinds/tailwinds for the company?

 

Thanks

PJM

[Sunrider]

1. At least $1.40 on cash basis, ROE working its way up to 10% over next year.

2. All of them. Depending on how fast you think the market price will reflect improvements (i.e. go to 20, 22, 24, you may want to choose LEAPs over warrants).

3. US economy and politicians doing stupid things. Housing recovery petering out, more pressure on mortgage underwriting revenues through declining volumes. Failure to deliver on new BAC II. Adverse judgement or more and more legal reserves.

 

C.

[PJM]

1. At least $1.40 on cash basis, ROE working its way up to 10% over next year.

2. All of them. Depending on how fast you think the market price will reflect improvements (i.e. go to 20, 22, 24, you may want to choose LEAPs over warrants).

3. US economy and politicians doing stupid things. Housing recovery petering out, more pressure on mortgage underwriting revenues through declining volumes. Failure to deliver on new BAC II. Adverse judgement or more and more legal reserves.

 

C.

 

Thanks. I am assuming that your 1.40 estimates is on pre-tax basis. So with DTAs it should creep up near 2?

 

 

 

[dcollon]

Mr. Moynihan's comments from Davos

 

http://www.bloomberg.com/video/moynihan-compliance-increase-will-prevent-mistakes-u0VU1Jz6TfuvNWDaFVZNFw.html

 

[Sunrider]

This year - no, not 2. Cash basis = including NOL cash benefit to income.

 

1. At least $1.40 on cash basis, ROE working its way up to 10% over next year.

2. All of them. Depending on how fast you think the market price will reflect improvements (i.e. go to 20, 22, 24, you may want to choose LEAPs over warrants).

3. US economy and politicians doing stupid things. Housing recovery petering out, more pressure on mortgage underwriting revenues through declining volumes. Failure to deliver on new BAC II. Adverse judgement or more and more legal reserves.

 

C.

 

Thanks. I am assuming that your 1.40 estimates is on pre-tax basis. So with DTAs it should creep up near 2?

[PJM]

This year - no, not 2. Cash basis = including NOL cash benefit to income.

 

1. At least $1.40 on cash basis, ROE working its way up to 10% over next year.

2. All of them. Depending on how fast you think the market price will reflect improvements (i.e. go to 20, 22, 24, you may want to choose LEAPs over warrants).

3. US economy and politicians doing stupid things. Housing recovery petering out, more pressure on mortgage underwriting revenues through declining volumes. Failure to deliver on new BAC II. Adverse judgement or more and more legal reserves.

 

C.

 

Thanks. I am assuming that your 1.40 estimates is on pre-tax basis. So with DTAs it should creep up near 2?

 

Would appreciate if you can explain how did you get that figure.

 

My estimates for 2014 are

Revenues - 90b (around 1% growth which should be same as GDP growth)

LAS expenses - 5b (though management expects it to reduce it to 1b quarterly by end of 2014)

Litigations - 6b (same as this year. BAC has 13.3b in R&W reserves)

Other expenses - 52b (54.2b in 2013 though management expects new BAC to have additional savings of $2 per quarter by mid 2015)

provisions - 6b (around 1.5b quarterly)

 

That gives us pre-tax income of 21b and EPS of 1.80

I still don't have clear understanding of DTA/NOL. I expect BAC will not have to pay any substantial taxes, so they should be able to earn 1.80 on post-tax basis. I'm not factoring in any share buybacks which should give further boast to EPS.

 

 

 

[ERICOPOLY]

On the conference call, in the Q&A, the management seemed to expect that the CCAR capital return request/approval would take into account their expected capital generation (with help from DTA) instead of looking at net income.  So that's helpful.