BAC-WT - Bank of America Warrants

[racemize]

I want another candy bar bet from Sanjeev!

[Kraven]

The math makes sense but I think regulators will largely look at last year's earnings instead of prospective.

The monster capital return will probably be delayed until March of 2015 for bac and citi

 

I can't imagine there will be a "monster" capital return with either BAC and C for a long, long time.  As long as there is any uncertainty in the world financial system (when is there not?) the Fed is going to rein them in.  They couldn't care less about shareholders.  Their job is to prop up the system.  They won't let funds out until they think the risk is gone.  Just my opinion. 

[ERICOPOLY]

The math makes sense but I think regulators will largely look at last year's earnings instead of prospective.

The monster capital return will probably be delayed until March of 2015 for bac and citi

 

I can't imagine there will be a "monster" capital return with either BAC and C for a long, long time.  As long as there is any uncertainty in the world financial system (when is there not?) the Fed is going to rein them in.  They couldn't care less about shareholders.  Their job is to prop up the system.  They won't let funds out until they think the risk is gone.  Just my opinion.

 

I'd be happy with their treatment of JPM for now.  They let them return quite a bit.

[ERICOPOLY]

They will ask for share buybacks that increase smoothly over time.

 

$1.8b x3

$2.1b x1

 

So they'll ask for $7.5b buybacks.

 

Then a $5b dividend (same starter level as last year's buyback).

[portfoolio]

They were clear in the conference call several quarters ago that in order to increase dividend/buybacks they need to demonstrate the ability to deliver consistent earnings. They've done that quarter after quarter. Compare the quarterly earnings before March 2013 and the situation today. Night and day. Plus the buyback approved in 2013 was very very conservative. The Fed has set standards for capital requirements and BAC is already exceeding those, years in advance. The idea that the Fed expects them to have a super-buffer above their substantial buffer is mistaken.

 

The capital return is also measured out quarter-by-quarter so if there is a change in situation it can be scaled back. Someone on here constantly complains at the slow rate of buybacks. That's obviously a Fed requirement.

 

For these reasons, I expect a pleasant surprise next month. I'm not going to predict numbers, but I think that some of the low-end predictions are off-the-mark.

 

 

[portfoolio]

They couldn't care less about shareholders.  Their job is to prop up the system.  They won't let funds out until they think the risk is gone.

 

What the global financial crisis taught the Fed is that the risk is never "gone". There is always a huge risk inherent in the financial system. So they have set up very stringent capital requirements. Banks need to meet those capital requirements and to not only survive but be able to continue to lend under stress test scenarios.

 

However, once banks meet those capital requirements, and perhaps with a buffer on top of that, they are not required to keep ADDITIONAL capital on their balance sheets. There is the requirement, there is a buffer, and beyond that the Fed has no interest in the banks keeping that on their balance sheet.

 

There are substantial advantages to having banks with high stock prices. They have an easier time, when needed, raising capital. They also inspire confidence in the financial system and probably are more willing to lend freely when they themselves are doing well. So the Fed has an interest in bank stocks performing well as part of the improvement in the overall economy.

 

That's not to say they will allow excessive dividends or buybacks in order to juice $XLF. I'm just saying that the Fed actually wants things "back to normal." And a normal situation is big banks like BAC giving a healthy dividend and doing buybacks.

[ERICOPOLY]

This Merrill Lynch customer in Montecito loves him some alpha!

 

I was shopping for a valentines gift in Montecito today -- literally standing in the jewelry store when I spied that license plate.

 

You can see Merrill Lynch in the background.

[kevin4u2]

The math makes sense but I think regulators will largely look at last year's earnings instead of prospective.

The monster capital return will probably be delayed until March of 2015 for bac and citi

 

I can't imagine there will be a "monster" capital return with either BAC and C for a long, long time.  As long as there is any uncertainty in the world financial system (when is there not?) the Fed is going to rein them in.  They couldn't care less about shareholders.  Their job is to prop up the system.  They won't let funds out until they think the risk is gone.  Just my opinion.

 

Here are some facts that may sway your "opinion". 

 

BAC is required to hold an additional 1.5% SIFI buffer.  This is an additional $19.3 billion on a fully phased in basis, today.  This is a 8.5% tier 1 capital requirement.  They have already met that buffer and have an additional $19.9 billion above that amount required (9.96% Tier 1 Basel III).  How much more do they need? 

 

Just by way of comparison, the bank with the best buffer is WFC, who 1% SIFI buffer amounts to $12.9 billion (8% requirement), and they have $22.9 billion in capital above that level. 

 

Citi would be next.  They are require to hold a 2.5% SIFI buffer of $30.0 billion (9.5%).  They have met this and are $11.7 billion above the buffer. 

 

JPM is last.  They also require a 2.5% SIFI buffer, amounting to $39.8 billion.  They just met the fully phased in capital requirement last quarter and have $0 above that buffer. 

 

I would argue that BAC and WFC are in the best position to increase their capital returns among the large banks.  You should also note that when calculating Tier 1 capital under Basel III, certain DTAs are excluded.  This gives Citi and BAC even bigger buffers, with much more going to Citi. 

 

So will it be a long, long time before they are allow to return capital??? 

 

As a shareholder it doesn't really matter when it is returned since it's really "money in the bank". 

[ERICOPOLY]

Two years ago, in 2012, just months after the European debt standoff thingy, the Fed approved JP Morgan to increase it's share repurchase plan by $9 billion (to a total of $15 billion!).  They additionally allowed raising JPM's quarterly dividend from 25 cents to 30 cents (which I think is roughly $4.5 billion dividend annually).

 

http://www.businessinsider.com/jpmorgan-announces-15-billion-buyback-2012-3

 

So that was two years ago.  You know, before JPM did their big $12b settlement.  Before raising JPM's capital levels to meet the new guidelines.  Before other world banks became relatively stronger, and the system relatively less fragile overall.

 

BAC's cash return on tangible equity (using DTA) is close to 14%.  On the latest conference call they said they believed the CCAR process would focus on capital generation, so they would give BAC credit for the DTA utilization.

[wescobrk]

 

 

Posts: 5073

Country: us

View Profile  Personal Message (Offline)

 

Re: BAC-WT - Bank of America Warrants

« Reply #4530 on: Today at 11:20:04 AM »

Quote

They will ask for share buybacks that increase smoothly over time.

 

$1.8b x3

$2.1b x1

 

So they'll ask for $7.5b buybacks.

 

Then a $5b dividend (same starter level as last year's buyback).

 

If your prediction is 7.5 billion common buyback then we don't have a disagreement. I was thinking 6-7 billion just for

common buyback.

 

I hope they are approved for more, I'm just skeptical.

[ERICOPOLY]

I view the remaining $1.8b quarterly buyback for Q1 14 (right now) as a signal of what the regulators wanted them to do.  Then the regulators will just give them approval to continue that pace through the end of this year, and then do another step-up in 2015.

 

That's how I arrived at $1.8b x3.  Q2, Q3, and Q4.

 

Then the step-up to $2.1b in Q1 next year.  So altogether, $7.5b.

 

 

[Uccmal]

I agree with both your synopses (is that a word) above. 

 

JPM and WFc are both paying a yield of 2.6%.  BAC is likely under pressure to bring it up to something comparable.  I bid  0.40 cents per share as the floor. 

 

Your buyback estimates seem entirely reasonable.  The bulk would be common stock.  I cant see them buying in much more preferreds,or bonds now.  They are getting to a stable run rate.  It is easy enough to sell cheaper debt and exchange it for pricier debt. 

[wescobrk]

Another reason for restraint is the nyag and Obama want to take as much as they can.

It was Obama after all that said he didn't run for office to help fat cat bankers.

[dutchman]

AIG holding BofA $8.5 billion settlement 'hostage,' investors say

 

http://www.reuters.com/article/2014/02/18/us-bankofamerica-mbs-settlement-aig-idUSBREA1H22220140218

[wisdom]

http://www.dailyfinance.com/2014/02/19/bank-of-america-khan-academy-bettermoneyhabits-financial-education/

 

thought this was interesting

[xazp]

AIG's bid to delay the settlement rejected.  Though they'll probably appeal. 

 

Still not sure the point of all this ... the Gibbs Brun lawyer said their clients are losing a million dollars a day through these delays.  So on the flip side, BAC is gaining a million dollars a day every time AIG delays. 

 

http://www.bloomberg.com/news/2014-02-19/bofa-8-5-billion-mortgage-bond-settlement-delay-bid-rejected.html?cmpid=yhoo

 

AIG holding BofA $8.5 billion settlement 'hostage,' investors say

 

http://www.reuters.com/article/2014/02/18/us-bankofamerica-mbs-settlement-aig-idUSBREA1H22220140218

[fareastwarriors]

Bank of America Boosts CEO's Pay

 

Moynihan to Get $14 Million in Salary, Bonus for His Work in 2013

 

 

 

nk of America Corp. BAC -1.64% boosted Chief Executive Brian Moynihan's salary and bonus 17% to $14 million for 2013, rewarding its top executive for a year in which the bank posted its strongest annual profit since 2007.

 

The second largest U.S. lender by assets paid its CEO $1.5 million in salary and $12.5 million in restricted shares, according to a regulatory filing Wednesday evening and a proxy statement from last year. The payout is Mr. Moynihan's largest since he took over the Charlotte, N.C., company in 2010.

 

Mr. Moynihan got $950,000 in salary and $11.1 million in restricted shares in 2012, a big raise that vaulted him past J.P. Morgan Chase JPM -2.10% & Co. CEO James Dimon in the ranks of the best-paid U.S. financial executives. He was awarded $7 million in 2011 and $10 million in 2010.

[buylowersellhigh]

Anybody adding their BAC position?  Warrants, commons or LEAPs?

[Straddle]

Anybody adding their BAC position?  Warrants, commons or LEAPs?

 

I added 12$ calls with expiry jan 2015 to my common long stock. Maybe I'll also be buying the bull call spread 17$-20$ with the same expiration date.

[dutchman]

Torn between adding to Citi or BofA right now !

[ourkid8]

Your decision on adding to Citi should have happened a couple of weeks back!!! 

 

Torn between adding to Citi or BofA right now !

[wescobrk]

All bank stocks up today and cities down.

Two weeks from the stress tests roughly.

The annual estimates came down 30 cents from q1 but the stock is down 7 bucks from q1.

So it comes down about 25x the earnings estimate revision on a stock with a 9 multiple.

[bmichaud]

I know everyone has probably seen this already, but I'm just now getting to the 4Q13 BAC transcript.....

 

LOVE this exchange between Mike Mayo and Bruce Thompson (CC page is attached):

 

Mayo: Okay. And in very simple terms, if you look for a 1% ROA on $2 trillion of assets, you hope to be at a kind of $2.00 annual run rate in later 2016?

 

Thompson: Yeah, the one piece -- and once again we’re not going to give it -- is that if you’re just doing that simple math you’ve not made any assumption with respect to the change in shares. So, and once again, given that we’re in the middle of CCAR, we’re not going to comment on that, but you do have some benefit over time through share count.

 

Stating the obvious, it appears Bruce sees at least $2 of EPS before giving effect to buybacks. In the attached PDF I try to model out the potential buyback effect. Some big assumptions, but I tried to be reasonable....

 

1. Total Assets and Net Loans remain flat at their respective 2013 FYE levels of $2.1T and $910.81B

2. Remaining New BAC of $2B achieved in a straight line thru 2017, with savings of $.5, $1 and $1.5B 2014-2016 and the final $2B in 2017

3. $6.9B of "non-core" LAS expense reduced in a straight line thru 2017 - same treatment as New BAC above

4. $5.1B of "non-core" litigation expense reduced in a straight line thru 2017

5. 2013 preferred dividends of $1,349 treated as "normalized" on a go-forward basis

6. "Normalized" Loan Loss Provision for each year assumed to be 1% of average net loans - because loans remain flat, LLP does as well

7. Effective tax rate of 15%, 20% and 25% in 2014, 2015 and 2016 before normalizing to 35% in 2017

 

8. Revenue treatment is very crude. I back into 2017 revenue by assuming a 1% Net Income ROA, a 35% tax rate then adding back all of the expenses. For the years between 2013 and 2017, I assume a straight line improvement in "Revenue ROA". The 2013 FTE Revenue ROA was 4.16%, and the implied 2017 Revenue ROA is 4.70% - so straight-lining the ROA figure generates a 2.4% 4-year Revenue CAGR. This seems reasonable given Thompson's/Moynihan's comments about arriving at the 1% ROA figure using current market expectations for interest rates.

 

9. For buybacks, I assume an annual repo equal to 80% of Net Income at an average PPS of $20 for the entire period.

 

Assuming the above, 2017 terminal EPS is $2.38 and the terminal value is $29.74 at a 12.5X PE. Assuming buybacks merely replace share issuance, then 2017 EPS is $1.96 and the terminal value is $24.56 at 12.5X.

BAC_4Q13_CC.pdf

BAC_2017_ROA_and_Buyback_Analysis.pdf

[ERICOPOLY]

I know everyone has probably seen this already, but I'm just now getting to the 4Q13 BAC transcript.....

 

LOVE this exchange between Mike Mayo and Bruce Thompson (CC page is attached):

 

Mayo: Okay. And in very simple terms, if you look for a 1% ROA on $2 trillion of assets, you hope to be at a kind of $2.00 annual run rate in later 2016?

 

Thompson: Yeah, the one piece -- and once again we’re not going to give it -- is that if you’re just doing that simple math you’ve not made any assumption with respect to the change in shares. So, and once again, given that we’re in the middle of CCAR, we’re not going to comment on that, but you do have some benefit over time through share count.

 

Stating the obvious, it appears Bruce sees at least $2 of EPS before giving effect to buybacks. In the attached PDF I try to model out the potential buyback effect. Some big assumptions, but I tried to be reasonable....

 

1. Total Assets and Net Loans remain flat at their respective 2013 FYE levels of $2.1T and $910.81B

2. Remaining New BAC of $2B achieved in a straight line thru 2017, with savings of $.5, $1 and $1.5B 2014-2016 and the final $2B in 2017

3. $6.9B of "non-core" LAS expense reduced in a straight line thru 2017 - same treatment as New BAC above

4. $5.1B of "non-core" litigation expense reduced in a straight line thru 2017

5. 2013 preferred dividends of $1,349 treated as "normalized" on a go-forward basis

6. "Normalized" Loan Loss Provision for each year assumed to be 1% of average net loans - because loans remain flat, LLP does as well

7. Effective tax rate of 15%, 20% and 25% in 2014, 2015 and 2016 before normalizing to 35% in 2017

 

8. Revenue treatment is very crude. I back into 2017 revenue by assuming a 1% Net Income ROA, a 35% tax rate then adding back all of the expenses. For the years between 2013 and 2017, I assume a straight line improvement in "Revenue ROA". The 2013 FTE Revenue ROA was 4.16%, and the implied 2017 Revenue ROA is 4.70% - so straight-lining the ROA figure generates a 2.4% 4-year Revenue CAGR. This seems reasonable given Thompson's/Moynihan's comments about arriving at the 1% ROA figure using current market expectations for interest rates.

 

9. For buybacks, I assume an annual repo equal to 80% of Net Income at an average PPS of $20 for the entire period.

 

Assuming the above, 2017 terminal EPS is $2.38 and the terminal value is $29.74 at a 12.5X PE. Assuming buybacks merely replace share issuance, then 2017 EPS is $1.96 and the terminal value is $24.56 at 12.5X.

 

There are 11.4 billion shares.  1% ROA is $20 billion on $2 trillion in assets.

 

The share count has to be reduced to 10 billion shares to get to $2 per share.

 

So Mayo's math assumes 1.4 billion shares retired.  Or, $22.82 billion dollars return through share repurchases.

 

If anything, Mayo might be too optimistic on there being 1.4 billion shares retired.

 

Plus -- don't the preferred dividends take a swipe at it?

 

[bmichaud]

Mayo used $2T, I used FYE 2013 total assets, which is $2.1T.

 

I used the basic share count b/c the BRK warrants don't come into play for years. The BRK warrants have a strike of $7.14. 700MM shares x $7.14 = $5B.

 

My 2017 projected basic share count is 8,836MM and my projected terminal value is $262.79B. If you add the $5B warrant proceeds to the terminal value and the 700MM shares to the basic share count, my estimated FYE 2016 terminal value falls from $29.74 to $28.08. My guess is the warrant dilution will be mitigated by higher-than-estimated earnings and/or buybacks, and TIME.

 

I assume preferred dividends to remain at 2013 levels in perpetuity.

 

 

 

 

 

 

EDIT: Scratch most of the above. You are right about the share count. I assumed I was missing something on the diluted share count when Mayo hinted at $2 EPS. He must be assuming buybacks.

 

I updated the PDF to reflect a 11.4B diluted share count. I assume $5B of BRK warrant proceeds at FYE 2016. Terminal value is now $28.17.

BAC_2017_ROA_and_Buyback_Analysis.pdf