BAC-WT - Bank of America Warrants

[Liberty]

Planmaestro on the 650m:

 

[treasurehunt]

The $8.5Bn settlement contains provisions that the amount paid out is deducted from other lawsuits on the same topic.  So if I'm due $500 million from the settlement, but litigate and win $600 million, I get a total of $600 million, not $600 + $500 from the settlement. 

 

I'm not sure how much AIG was owed under the settlement, but I don't believe it's like AIG is getting an additional $650 million beyond the Gibbs/Brun settlement.  Rather I think it's a way of AIG to save some face, and for both parties to stop paying endless litigation costs. 

 

xazp, I am not sure you are right about this. Here's a relevant sentence from AIG's press release on the BofA settlement: "Under the terms of the settlement, AIG will receive $650 million in cash plus its pro rata share of whatever amount is ultimately paid out to investors in connection with the Countrywide repurchase settlement."

[xazp]

Thanks.  I hadn't looked at the AIG side of things.  But on the side, BAC said the settlement was covered under existing reserves. 

 

So the $8.5Bn settlement, that covered countrywide.  The overall AIG/BAC settlement appears to cover A) Countrywide; B) Merrill + BAC securities; C) securities that AIG insured against loss. 

 

So it's possible the $650M is mostly aimed at B and C, even though it nominally also covers A.  I'm not sure. 

 

 

 

The $8.5Bn settlement contains provisions that the amount paid out is deducted from other lawsuits on the same topic.  So if I'm due $500 million from the settlement, but litigate and win $600 million, I get a total of $600 million, not $600 + $500 from the settlement. 

 

I'm not sure how much AIG was owed under the settlement, but I don't believe it's like AIG is getting an additional $650 million beyond the Gibbs/Brun settlement.  Rather I think it's a way of AIG to save some face, and for both parties to stop paying endless litigation costs. 

 

xazp, I am not sure you are right about this. Here's a relevant sentence from AIG's press release on the BofA settlement: "Under the terms of the settlement, AIG will receive $650 million in cash plus its pro rata share of whatever amount is ultimately paid out to investors in connection with the Countrywide repurchase settlement."

[xazp]

Planmaestro has a good point here.  BAC fell like 20% when AIG sued it for $10Bn.  But the ultimate amount, $650M, was not meaningful.  When AIG sued BAC, August 2011, was a very very good time to buy the stock :). 

 

 

Planmaestro on the 650m:

 

[finetrader]

Negociations hit a snag

 

http://dealbook.nytimes.com/2014/07/16/bank-of-america-earnings-slump-43/?_php=true&_type=blogs&partner=yahoofinance&_r=0

 

 

 

[MYDemaray]

BAC (IMHO) should let them sue.

In two years we'll have a new administration and this matter can be reasonably settled at that point.

[xazp]

One of the only times I'll recommend a TMF article:

http://www.fool.com/investing/general/2014/07/17/after-aig-settlement-bank-of-america-has-only-2-ma.aspx

 

He's cataloged every BAC lawsuit/litigation.  He's recorded about 50 settlements and only has 2 more cases remaining.  I think we're in the 9th inning here (I also welcome litigation - which would more or less guarantee that BAC wouldn't need to pay anything for 5 years). 

[Mephistopheles]

One of the only times I'll recommend a TMF article:

http://www.fool.com/investing/general/2014/07/17/after-aig-settlement-bank-of-america-has-only-2-ma.aspx

 

He's cataloged every BAC lawsuit/litigation.  He's recorded about 50 settlements and only has 2 more cases remaining.  I think we're in the 9th inning here (I also welcome litigation - which would more or less guarantee that BAC wouldn't need to pay anything for 5 years). 

 

Ambac is the other remaining case besides the DOJ.

 

Why then in the bank's first quarter release, after the settlement with FGIC, did they say to have resolved disputes with the four monolines?:

 

"With this settlement, Bank of America has resolved disputes with four monolines."

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1919084&highlight=#fbid=gkSNXCSmz0D

[xazp]

"With this settlement, Bank of America has resolved disputes with four monolines."

 

as opposed to "the four monolines."  I take this to mean they've settled with some of the smaller ones, but still not Ambac. 

 

 

 

One of the only times I'll recommend a TMF article:

http://www.fool.com/investing/general/2014/07/17/after-aig-settlement-bank-of-america-has-only-2-ma.aspx

 

He's cataloged every BAC lawsuit/litigation.  He's recorded about 50 settlements and only has 2 more cases remaining.  I think we're in the 9th inning here (I also welcome litigation - which would more or less guarantee that BAC wouldn't need to pay anything for 5 years). 

 

Ambac is the other remaining case besides the DOJ.

 

Why then in the bank's first quarter release, after the settlement with FGIC, did they say to have resolved disputes with the four monolines?:

 

"With this settlement, Bank of America has resolved disputes with four monolines."

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1919084&highlight=#fbid=gkSNXCSmz0D

[Aberhound]

http://online.wsj.com/articles/blackrock-pimco-sue-deutsche-bank-u-s-bank-over-trustee-roles-1403124442

 

I am grateful BAC settled so won't be part of the $250B lawsuit. JPM also settled. I wonder how much this will cost Citibank, Wells Fargo and the others? BAC paid $8.5B and JPM paid $4.5B in 2013 to settle with Blackrock and Pimco. 

[Mephistopheles]

"With this settlement, Bank of America has resolved disputes with four monolines."

 

as opposed to "the four monolines."  I take this to mean they've settled with some of the smaller ones, but still not Ambac. 

 

 

 

One of the only times I'll recommend a TMF article:

http://www.fool.com/investing/general/2014/07/17/after-aig-settlement-bank-of-america-has-only-2-ma.aspx

 

He's cataloged every BAC lawsuit/litigation.  He's recorded about 50 settlements and only has 2 more cases remaining.  I think we're in the 9th inning here (I also welcome litigation - which would more or less guarantee that BAC wouldn't need to pay anything for 5 years). 

 

Ambac is the other remaining case besides the DOJ.

 

Why then in the bank's first quarter release, after the settlement with FGIC, did they say to have resolved disputes with the four monolines?:

 

"With this settlement, Bank of America has resolved disputes with four monolines."

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1919084&highlight=#fbid=gkSNXCSmz0D

 

That makes sense. Thanks

[Uccmal]

In the 4+ years I have held BAC, I have  never seen the future look as clear as this.

 

Lets recap:

1) They appear to have added about 3'b to reserves for the DOJ settlement as estimated by BAC.  It may come in as more but it is roughly a known quantity from here.  Say 4 B more on the upper side which is one Q earnings.  Not good but known.

2) No other Quarter killing litigation appears to exist - at this time

3) Expenses and debt are coming down toward some sort of reasonable run rate.

4) NIM are as tight as they are going to be.  Should/when rates rise the spread will widen and go straight to the bottom line.

5) All capital ratio requirements have been met - this should bode well for cash return.

 

Negatives:

1) CCAR - fed. may deny them this for this year.  That might  mean two/three more Qs of cash added to the balance sheet in the worst case.

2) DOJ - for some reason they may want far more than headlined so far. 

 

Risks to stock price but not the ongoing business:

1) a recession

2) DOJ

 

I think that the stock at 15.30 looks like a steal - then I have been saying that for a year.

[onyx1]

In the 4+ years I have held BAC, I have  never seen the future look as clear as this.

 

Lets recap:

1) They appear to have added about 3'b to reserves for the DOJ settlement as estimated by BAC.  It may come in as more but it is roughly a known quantity from here.  Say 4 B more on the upper side which is one Q earnings.  Not good but known.

2) No other Quarter killing litigation appears to exist - at this time

3) Expenses and debt are coming down toward some sort of reasonable run rate.

4) NIM are as tight as they are going to be.  Should/when rates rise the spread will widen and go straight to the bottom line.

5) All capital ratio requirements have been met - this should bode well for cash return.

 

Negatives:

1) CCAR - fed. may deny them this for this year.  That might  mean two/three more Qs of cash added to the balance sheet in the worst case.

2) DOJ - for some reason they may want far more than headlined so far. 

 

Risks to stock price but not the ongoing business:

1) a recession

2) DOJ

 

I think that the stock at 15.30 looks like a steal - then I have been saying that for a year.

 

 

It's great to see the cleanup come to and end.  But the result is a big change in the nature of BAC as an investment.  With litigation and expense reduction winding down, BAC shareholders now have to rely on things that are completely out of managements's control.  Like higher interest rates and a better lending environment, both unpredictable in timing and magnitude.  Every quarter BAC feels more like an "operation leverage option on things getting better" type of investment.

 

As far as value, BAC looks to be running at an annualized EPS of $1.75/share after cleaning up one-time items, normalizing for the decades low provisions, and assuming the remaining New BAC and LAS expense targets are met.  Use an 11x multiple and add $2/share for the net DTA's and we get $21/share.

 

If management's view of 100bp shift in rates by 2016 comes to pass, we are looking at EPS around $2.00/share and the $21 grows to $24/share. 

 

Overall, I see BAC as a little on the cheap side assuming rates are unchanged, but solidly cheap if rates rise. 

 

Please join me in praying for higher rates!

[xazp]

This is a good list Uccmal. 

 

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

 

 

In the 4+ years I have held BAC, I have  never seen the future look as clear as this.

 

Lets recap:

1) They appear to have added about 3'b to reserves for the DOJ settlement as estimated by BAC.  It may come in as more but it is roughly a known quantity from here.  Say 4 B more on the upper side which is one Q earnings.  Not good but known.

2) No other Quarter killing litigation appears to exist - at this time

3) Expenses and debt are coming down toward some sort of reasonable run rate.

4) NIM are as tight as they are going to be.  Should/when rates rise the spread will widen and go straight to the bottom line.

5) All capital ratio requirements have been met - this should bode well for cash return.

 

Negatives:

1) CCAR - fed. may deny them this for this year.  That might  mean two/three more Qs of cash added to the balance sheet in the worst case.

2) DOJ - for some reason they may want far more than headlined so far. 

 

Risks to stock price but not the ongoing business:

1) a recession

2) DOJ

 

I think that the stock at 15.30 looks like a steal - then I have been saying that for a year.

 

 

It's great to see the cleanup come to and end.  But the result is a big change in the nature of BAC as an investment.  With litigation and expense reduction winding down, BAC shareholders now have to rely on things that are completely out of managements's control.  Like higher interest rates and a better lending environment, both unpredictable in timing and magnitude.  Every quarter BAC feels more like an "operation leverage option on things getting better" type of investment.

 

As far as value, BAC looks to be running at an annualized EPS of $1.75/share after cleaning up one-time items, normalizing for the decades low provisions, and assuming the remaining New BAC and LAS expense targets are met.  Use an 11x multiple and add $2/share for the net DTA's and we get $21/share.

 

If management's view of 100bp shift in rates by 2016 comes to pass, we are looking at EPS around $2.00/share and the $21 grows to $24/share. 

 

Overall, I see BAC as a little on the cheap side assuming rates are unchanged, but solidly cheap if rates rise. 

 

Please join me in praying for higher rates!

[racemize]

Wouldn't LAS going from $1.1 billion / quarter (Q1 2015) down to a normal run rate (I think they said $500 million?) do a lot of the reconciliation to JPM/WFC?

[xazp]

I think the drop in LAS to $500MM is already embedded in the $22Bn number that I am talking about.  I have it at $500MM in Q4 2015, so the 2016 - $22Bn projection is already based on LAS and "new bac" being fully contributing to earnings.  There's still another ~$6Bn I'm missing.

 

I mean it could just be management ... WFC has long out-earned BAC and I'm not even hoping they ever get to WFC level. 

 

 

 

Wouldn't LAS going from $1.1 billion / quarter (Q1 2015) down to a normal run rate (I think they said $500 million?) do a lot of the reconciliation to JPM/WFC?

[Liberty]

I mean it could just be management ... WFC has long out-earned BAC and I'm not even hoping they ever get to WFC level. 

 

Management and culture within the broader company would be my guess, but I'm not as knowledgeable about this business as you guys.

[fareastwarriors]

Banks Aren’t Quite Ready to Let Go of Reserve Releases

 

 

http://blogs.wsj.com/moneybeat/2014/07/18/banks-arent-quite-ready-to-let-go-of-reserve-releases/

[Andy Dufresne]

xzap - I am no expert, but JPM has 260K employees while BAC has 239K, so this might also explain some of the difference ...

[treasurehunt]

This is a good list Uccmal. 

 

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

As of Q2 2014, JPM has 2462 billion in tangible assets compared to 2098 billion for BofA. So if BofA can earn as much on tangible assets as JPM, we can expect about 23.9 billion in earnings (assuming JPM earns 28 billion).

 

If we look back 3 years to Q2 2011, BofA had tangible assets of 2184 billion. JPM had tangible assets of 2182 billion at the same time. Clearly JPM has been growing assets nicely; BofA not so much.

 

Maybe BofA will now start growing assets at the same rate as JPM, but you can't blame the market for being skeptical. Given recent history, I don't think JPM is trading at much of a premium to BAC.

[xazp]

That is a fair point.  BAC used to be bigger than JPM, but over time BAC is shrinking while JPM is growing.  It's still in my head they are about the same size, but they aren't any more. 

 

But your answer points to a different possibility.  The reason BAC is shrinking is, they're running off a bunch of legacy loans (cough, cough, Countrywide, cough).  Some of those are just not the business they want to be in, like some of the HELOCs or mortgages they issued during the bubble at high LTVs, and possibly to poor credit risks.  Eventually those loans will run off and be replaced by better quality loans.  Possibly at higher interest rate loans. 

 

Perhaps as those run off, you'll see the gap shrink, ROA/ROE rise, and also assets themselves rise?

 

That's a different plausible explanation.  Any takers for that? 

 

 

 

This is a good list Uccmal. 

 

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

As of Q2 2014, JPM has 2462 billion in tangible assets compared to 2098 billion for BofA. So if BofA can earn as much on tangible assets as JPM, we can expect about 23.9 billion in earnings (assuming JPM earns 28 billion).

 

If we look back 3 years to Q2 2011, BofA had tangible assets of 2184 billion. JPM had tangible assets of 2182 billion at the same time. Clearly JPM has been growing assets nicely; BofA not so much.

 

Maybe BofA will now start growing assets at the same rate as JPM, but you can't blame the market for being skeptical. Given recent history, I don't think JPM is trading at much of a premium to BAC.

[onyx1]

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

 

 

    These are great questions that get right to the essence of culture and productivity.  I wish I had some answers or knew someone who did.  Deposit rates are basically the same among banks so somewhere in the mix of productivity, culture and assets is the answer but where to start looking?  These are massive and complex organizations.  I have to assume that BAC management knows the answers but as far as I can see they have not said anything about an aspiration to get above their 1% ROA target.  That suggests that they don't think it is realistic or possible (in the short term at least) to achieve ROAs like those at WFC and JPM.  BB said early on a 1% ROA is a good target for BAC, I wonder what he, and WEB,  thinks now.

 

 

BTW xazp, thanks for your posts on this thread over the last several years.  Superb contributions.

[xazp]

So there are potential financial reasons:

  - higher priced debt(?) that can roll off

  - run-off assets

  - both of these should fix themselves slowly over time. 

 

There are potential employee issues:

  - BAC might not be able to hire the best talent

  - They may be too short-term in thinking (vs. WFC)

  - the layoffs may be hurting morale

 

There are potentially structural issues:

  - WFC is really good at cross-selling which is the closest a bank can come to locking-in customers

  - BAC is not as good, and, possibly not as able to get to the levels that WFC already has

 

I don't really know the answer here.  I feel like Buffett understands cultures and competitive advantages in banking; I haven't anyone articulate it really clearly to me in a way that I could understand whether BAC can or can not emulate WFC (not total emulation, but if you close half the gap on ROE/ROA that is worth a lot to the stock).

 

 

 

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

 

 

    These are great questions that get right to the essence of culture and productivity.  I wish I had some answers or knew someone who did.  Deposit rates are basically the same among banks so somewhere in the mix of productivity, culture and assets is the answer but where to start looking?  These are massive and complex organizations.  I have to assume that BAC management knows the answers but as far as I can see they have not said anything about an aspiration to get above their 1% ROA target.  That suggests that they don't think it is realistic or possible (in the short term at least) to achieve ROAs like those at WFC and JPM.  BB said early on a 1% ROA is a good target for BAC, I wonder what he, and WEB,  thinks now.

 

 

BTW xazp, thanks for your posts on this thread over the last several years.  Superb contributions.

[Uccmal]

One needs to look at where WFc was when Buffett and Berkowitz started buying.  The company was overextended on bad loans, specifically California real estate.  The were in full retrenchment mode for a few years.  I think the cultural change was a result of the trouble they got in. 

 

I see no reason at all that BAC wont perform as well as WFC going forward.  It will take a few years to produce similar numbers as WFC.  Right now, they are erring on the side of over conservatism, partly because they are not getting the interest spreads to justify the risk.  I see that as a good sign for the future. 

 

One of my favourite value investment books is David Dreman's "Contrarian Investment Strategies...".

In it he discusses how companies and their stock prices outperform the general market long after they have left the value investors "emergency ward".  That is where I see BAC right now. 

 

Unless, something dramatic changes I intend on making BAC a major long term core holding when I convert some of my Leaps in 2016. 

[kevin4u2]

The other big factor is the cost of funding. Banking is commodity like and the lowest cost supplier has the advantage.

 

Both BAC and WFC have huge low cost deposit bases relative to the competition. Merrill is also a first class business, with great margins. BAC has great prospects going forward.

 

So there are potential financial reasons:

  - higher priced debt(?) that can roll off

  - run-off assets

  - both of these should fix themselves slowly over time. 

 

There are potential employee issues:

  - BAC might not be able to hire the best talent

  - They may be too short-term in thinking (vs. WFC)

  - the layoffs may be hurting morale

 

There are potentially structural issues:

  - WFC is really good at cross-selling which is the closest a bank can come to locking-in customers

  - BAC is not as good, and, possibly not as able to get to the levels that WFC already has

 

I don't really know the answer here.  I feel like Buffett understands cultures and competitive advantages in banking; I haven't anyone articulate it really clearly to me in a way that I could understand whether BAC can or can not emulate WFC (not total emulation, but if you close half the gap on ROE/ROA that is worth a lot to the stock).

 

 

 

Onyx, my question: why aren't greater earnings possible from BAC absent an interest rate rise?  It's a serious question. 

 

JPM and BAC are fairly similar companies in terms of size, assets, breadth of operations, etc.  But BAC's target for $2/share after interest rates rise is below what JPM earns today with low interest rates.  Why?

 

What are the structural reasons that BAC has to earn lower ROA, ROE, etc than JPM (or crazier yet, WFC?)

 

BAC will close some of the gap with cost cutting, and, it will experience a good uplift with interest rates.  That's a good enough reason to hold for now. 

 

But looking down the road, JPM can probably earn $28Bn/year, while we're talking $22Bn or so for BAC.  Any hope of closing the remaining $6Bn gap?  Or some of it? 

 

 

    These are great questions that get right to the essence of culture and productivity.  I wish I had some answers or knew someone who did.  Deposit rates are basically the same among banks so somewhere in the mix of productivity, culture and assets is the answer but where to start looking?  These are massive and complex organizations.  I have to assume that BAC management knows the answers but as far as I can see they have not said anything about an aspiration to get above their 1% ROA target.  That suggests that they don't think it is realistic or possible (in the short term at least) to achieve ROAs like those at WFC and JPM.  BB said early on a 1% ROA is a good target for BAC, I wonder what he, and WEB,  thinks now.

 

 

BTW xazp, thanks for your posts on this thread over the last several years.  Superb contributions.