BAC-WT - Bank of America Warrants

[bmichaud]

Who cares about today's non-normal basis or today's anything? As Grantham says in his latest letter, the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value. The primary job today is to determine whether or not BAC can earn its way through this restructuring period and come out the other side with a clean terminal value. Thus the only relevance today has is how well BAC can earn its way through with today's cash flow.

 

This quarter BAC generated $9B of PTPP before LAS expenses, which is $36B annualized or $180B cumulative over the next five years. 

 

In 5 years, BAC will be 100% through pre-fin crisis underwriting (assuming 7 year average loan life). R&W exposure will be entirely null and void unless fannie and freddie go after pre-2004 vintages and/or go after loans with greater than 25 payments.

 

Total 2004-2008 principle exposed to repurchase demands for both agency and non-agency is less than $200B - this is the big bad scary number that Zero Hedge will cite as what could potentially wipe out BAC's equity. Doesn't take much to figure out that there is a certain rate of request BAC has historically faced and then further a loss rate on what is actually repurchased - rendering that $200B number not nearly as relevant as it seems.

 

So let's say annual LAS non-core expense is $12B or $60B cumulative over 5 years, remaining RW exposure is $25B, and annual provision expense is $13B or $65B over 5 years - that's $150B of crap that BAC has to earn its way through over five years. If cumulative PTPP is $180B, that means $30B is left over in five years, or $2.60 per share assuming 11.5B shares out.

 

For sake of simplicity let's say in year six BAC is able to earn 10% on BV, or $1.80 per share - 10x that is $18 + the $2.60 of cash left over is a $21 share price in five years. Discounted back at 12% is $11.92 in today's terms or $13 at 10%. 

[Kraven]

 

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

 

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

[racemize]

Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

 

I guess I'm missing the part where you are challenging the long views--the answers given all have to do with where the bank will be in a few years, but you keep asking where it will be in the short term.  Also, no one is providing the reason, "because [berkowitz/Buffett/etc.] did it", so I think your second point is not pertinent.

 

Edit: Also +1 to bmichaud's post above

[PlanMaestro]

Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

 

You are not being a pain, you can easily be ignored if needed. Breathe before you write. Do not insult and focus on the facts. Recognize the facts that are pointed to you. Do not play innuendo or hyperbole. Protect the forum and the quality of the discussion.

 

[ERICOPOLY]

Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

 

Forget Berkowitz and Buffett, I'm long because a month ago hardincap wrote that he wanted the company to buy back stock before it hits $15-$20 in a year.

[txlaw]

txlaw, since you think the co is cheap compared to its non normal earnings, what do you estimate yearly PTPP rate to be currently?

 

To be clear, when I say non-normal earnings, I include expense reductions that I think will occur over the next five years, include returns on incrementally invested capital that is generated through core ops and rationalization/freeing up of capital from non-core ops and assets, exclude accounting issues such as debt valuation adjustments, and adjust for segments that currently bleed cash like CRES.  All conservative estimates and I like to look at ranges of outcomes.

 

But I also assume a "not normal" macroeconomic environment.  In other words, the way I have valued BAC for my own purposes, I assume a compressed NIM for a long time and very little bounce back in income from i-banking activities and other non-interest income such as card services.  I also don't factor in cross selling success.

 

But I'm still looking out five years from now, so I don't really feel that current annualized PTPP means much in the analysis.  Suffice it to say I can see BAC easily hitting the $35b number five years from now if we get to a normalized macro environment and even if we don't get to a normalized macro environment.  10% ROE is not a fantasy, IMO.

 

We all agree bac is cheap on a normalized basis but you haven't answered why it's cheap on today's nonnormal basis.

 

I think I was trying to demonstrate in my last post that I am taking into account a non-normal macroeconomic environment when I say BAC is cheap.  I don't really see why you want to annualize current PTPP based on "collapsed revenues," negative spreads for certain segments, and elevated expenses, and take that as what BAC earns forever going forward.

 

bmichaud has obliged in terms of giving specific numbers, but I hate doing that in board posts because it just invites nitpicking.  If I were to give a range of earnings, which present a MOS and potential great upside, that would not be enough for people, and people would annoyingly try to dissect every single thing about the projections.

 

This isn't the VIC, and I don't like having to resort to false precision in order to make a point.

[txlaw]

 

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 

 

 

As far as the phase in milestones, it's a complete joke.  They need to hit 3.5% by 2013.  As you read this they are likely already prepared to hit the 2017 numbers.

 

See slide 21 for the rest of the milestones:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

 

They are now saying "above 7.5%" by end of 2012 per latest CC.

 

Those milestones are shockingly low.  I guess, because of the problems at the European banks?

[hardincap]

 

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

 

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

 

yes wfc has a long reputation for being masters at cross selling.

[Kraven]

 

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

 

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

 

yes wfc has a long reputation for being masters at cross selling.

 

LOL, stop please, my sides hurt.  Is there a camera on me?  Masters of cross selling?  Perhaps you would be so kind as to educate me on how they are better at cross selling.  Some examples and details would be great.

[ERICOPOLY]

 

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 

 

 

As far as the phase in milestones, it's a complete joke.  They need to hit 3.5% by 2013.  As you read this they are likely already prepared to hit the 2017 numbers.

 

See slide 21 for the rest of the milestones:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

 

They are now saying "above 7.5%" by end of 2012 per latest CC.

 

Those milestones are shockingly low.  I guess, because of the problems at the European banks?

 

Also noteworthy is the 0% capital deduction for 2013.  Compare that against BAC's guidance for 7.5%+ on a capital deduction fully phased in basis (this doesn't even become the official rule until 2018).

 

 

 

[Tim Eriksen]

Who cares about today's non-normal basis or today's anything? As Grantham says in his latest letter, the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value. The primary job today is to determine whether or not BAC can earn its way through this restructuring period and come out the other side with a clean terminal value. Thus the only relevance today has is how well BAC can earn its way through with today's cash flow.

 

 

Not to side track the conversation, but the idea that "the majority of a business's value is derived from what happens beyond the next twenty years" contradicts that the value of a firm is the present value of future cash flows discounted back to the present.  Grantham actually wrote, "As GMO's Ben Inker has written, two-thirds of all corporate value lies out beyond 20 years" which seems even more absurd. 

 

Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.  If an analysts terminal value is much more than that he/she likely has irrational future assumptions.   

 

 

[bmichaud]

Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.  If an analysts terminal value is much more than that he/she likely has irrational future assumptions.

 

 

Going to have to respectfully disagree with you here. Curious how you arrive at the 25% figure.....

 

The attached spreadsheet is 20-year DCF of the S&P 500 using a normalized EPS figure of $70 per share as a starting point:

 

Cost of equity:      9%  (long-run return of the market according to GMO)

Growth rate:          6%  (long-run average earnings growth)

Terminal PE:          16.2 (times (the current history-to-date median Schiller PE ratio)

Payout ratio:        40%

 

Based on this DCF, which is a reasonable approximation of corporate America (is it not?), the present value of the terminal value represents 62% of the estimated fair value (i.e. all cash flows discounted back to today).

 

Perhaps we can banter about the inputs and bring the TV's influence down to 50%, but the point stands that the terminal value is critically important to the CURRENT fair value of any infinite-lived asset, MUCH more so than the 25% you cite.

 

SP_500_DCF_Model.xls

[StubbleJumper]

 

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

 

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

 

yes wfc has a long reputation for being masters at cross selling.

 

LOL, stop please, my sides hurt.  Is there a camera on me?  Masters of cross selling?  Perhaps you would be so kind as to educate me on how they are better at cross selling.  Some examples and details would be great.

 

 

Is WFC better at cross selling based on actual numbers?  Hard to know because there is no official definition of what constitutes a bank "product."  It's virtually certain that all banks measure their cross selling success differently.

 

However, that being said, having spent a few years perusing the investor propaganda on the WFC website, I can tell you that cross selling figures prominently in virtually every management presentation that I've flipped through.  WFC is very proud to show modest increases in the number of products per customer over a 5 or 6 year time frame, and identifies cross-selling as an opportunity to get further value from the Wachovia takeover.  It's hard to know whether WFC is actually drastically better than the other banks because there is no official measure and no systematic methodology to compare banks.  But if management's seeming obsession actually drives results (by training and compensating employees for cross-sales), then I would have no trouble believing that they'd be ahead of the crowd.

 

But ultimately, nobody really knows for sure which of WFC and BAC has the superior cross-sell results.

[Tim Eriksen]

Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.  If an analysts terminal value is much more than that he/she likely has irrational future assumptions.

 

 

Going to have to respectfully disagree with you here. Curious how you arrive at the 25% figure.....

 

The attached spreadsheet is 20-year DCF of the S&P 500 using a normalized EPS figure of $70 per share as a starting point:

 

Cost of equity:      9%  (long-run return of the market according to GMO)

Growth rate:          6%  (long-run average earnings growth)

Terminal PE:          16.2 (times (the current history-to-date median Schiller PE ratio)

Payout ratio:        40%

 

Based on this DCF, which is a reasonable approximation of corporate America (is it not?), the present value of the terminal value represents 62% of the estimated fair value (i.e. all cash flows discounted back to today).

 

Perhaps we can banter about the inputs and bring the TV's influence down to 50%, but the point stands that the terminal value is critically important to the CURRENT fair value of any infinite-lived asset, MUCH more so than the 25% you cite.

 

The primary difference is that I analyze as a business owner (even though I am buying a fractional ownership via shares) and you look at it as an investor.  In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.  Minor differences are that I use a slightly higher discount rate and lower terminal value PE. 

 

I would still argue that the majority of value is derived from the next twenty years and not the terminal value.  While your approach makes it appear that the terminal value generates most of the value, it is due to the retained earnings from the next twenty years not what occurs in years 21 and later.

   

[Kraven]

Is WFC better at cross selling based on actual numbers?  Hard to know because there is no official definition of what constitutes a bank "product."  It's virtually certain that all banks measure their cross selling success differently.

 

However, that being said, having spent a few years perusing the investor propaganda on the WFC website, I can tell you that cross selling figures prominently in virtually every management presentation that I've flipped through.  WFC is very proud to show modest increases in the number of products per customer over a 5 or 6 year time frame, and identifies cross-selling as an opportunity to get further value from the Wachovia takeover.  It's hard to know whether WFC is actually drastically better than the other banks because there is no official measure and no systematic methodology to compare banks.  But if management's seeming obsession actually drives results (by training and compensating employees for cross-sales), then I would have no trouble believing that they'd be ahead of the crowd.

 

But ultimately, nobody really knows for sure which of WFC and BAC has the superior cross-sell results.

 

Cross selling and other buzzwords of it's type are like the Yeti or Big Foot of the business world.  Lots of people claim to have seen them, but there's only fuzzy pictures and no real proof.  It's a lofty goal to look for it, but plenty have tried and failed.  Cross selling well is like being the best house painter.  Sure, someone has to be the best, but presumably anyone can really learn it and worst case you hire the guy doing it.

 

Anyone who has ever been involved in any kind of banking business or a similar customer oriented business knows about cross selling.  There's also the focus on only high value engagements, being a trusted advisor to clients, etc.  All drivel.  Nothing wrong with trying to do these things, but typically they are done for a while after some kind of in person meeting and then it fades.  It can do something with the carrot and the stick, but the carrot will never be enough for someone who fears that their business is going to get stolen and the stick will never be applied to anyone who actually has business.  Sure, if you're talking about some bank teller cross selling the mortgage department, whatever.  But if you think that every bank on the street isn't doing the exact same thing, that wouldn't be accurate.

 

I just wouldn't put any weight on that type of amorphous positive to an institution.  It can change on a dime.  Wait for it, once BAC and/or C run up to book value, whenever that is, you will see articles in the paper and magazines on how the culture is simply so much better than it was and people are working together, cross selling, etc.  Just means business has picked up a bit and people aren't trying to kill each other.  Once there's enough money sloshing around and people aren't afraid of losing a chair when the music stops, sure, they're happy to recommend a colleague . . . but of course only if they get credit for it too!

[Vish_ram]

check this WSJ article on cross-selling

 

http://online.wsj.com/article/SB10001424052748704430304576170702480420980.html

 

I think this is a useless metric, I'm a WFC customer; I've two IRA accounts with wellstrade, and to qualify for PMA, I had to setup 2 dummy accounts with $100 deposit. In total, I've 2 savings, 2 checkings and 2 IRA. In reality, I only use one checking for all transactions.

 

During wells fargo & first union days, I hardly get pitched on new products. In WFC, hardly a day goes by without seeing annoying pop-up or initial screen about signing up for some product (e-vault anyone?)

[StubbleJumper]

 

Anyone who has ever been involved in any kind of banking business or a similar customer oriented business knows about cross selling.  There's also the focus on only high value engagements, being a trusted advisor to clients, etc.  All drivel.  Nothing wrong with trying to do these things, but typically they are done for a while after some kind of in person meeting and then it fades.  It can do something with the carrot and the stick, but the carrot will never be enough for someone who fears that their business is going to get stolen and the stick will never be applied to anyone who actually has business.  Sure, if you're talking about some bank teller cross selling the mortgage department, whatever.  But if you think that every bank on the street isn't doing the exact same thing, that wouldn't be accurate.

 

 

 

Sure, every bank is doing it.  But, not every bank is dedicating one or two slides talking about the importance of cross selling in virtually EVERY investor presentation.  My experience is that when senior management is focused on a metric (like number of products per client) and when they drive bonuses from that metric, they normally get what they pay for (for better or for worse).  Call it drivel if you like, but WFC's obsession seems to have resulted in moderate, steady growth in products per client and hopefully that results in improved profitability.

 

Is BAC achieving a similar result (or better?) without the obsession of presenting it "up front and centre" in its investor propaganda?  Possibly.  But given their financial results for the past few years, you'd think that they'd be trying to seize on ANY positive metric they could find which they do not seem to have done.

 

 

SJ

[bmichaud]

In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.

 

No matter public or private, the only cash flow you will receive as an owner or investor (not entirely sure what the difference is) is in the form of dividends/buybacks, is it not? The only benefit you reap from retained earnings profitability reinvested for growth is in the form of a higher overall future valuation - i.e. a terminal value.

 

You are valuing your cash flows while I am valuing the firm's cash flows.

 

What is the difference? Free cash flow to equity holders is the cash flow available to pay dividends, buyback stock, payback debt or reinvest for growth - FCF to equity in its entirety is MY cash flow available for me to do what I want. If I owned 100% of the business then I could decide - rather, as a public shareholder, I elect a board to oversee a management team to hopefully intelligently allocate MY free cash flow.

[Kraven]

Sure, every bank is doing it.  But, not every bank is dedicating one or two slides talking about the importance of cross selling in virtually EVERY investor presentation.  My experience is that when senior management is focused on a metric (like number of products per client) and when they drive bonuses from that metric, they normally get what they pay for (for better or for worse).  Call it drivel if you like, but WFC's obsession seems to have resulted in moderate, steady growth in products per client and hopefully that results in improved profitability.

 

Is BAC achieving a similar result (or better?) without the obsession of presenting it "up front and centre" in its investor propaganda?  Possibly.  But given their financial results for the past few years, you'd think that they'd be trying to seize on ANY positive metric they could find which they do not seem to have done.

 

 

SJ

 

Well, there you go.  It's in the slides.  Look, I'm not saying it's not something to work for, but I could also cynically tell you that when things like this are in not 1, but 2 dedicated slides it's because there's nothing else better to say. 

 

Bonuses on things like cross selling are for people like bank tellers.  The people who actually make money for the bank aren't impacted unless it doesn't matter anyway.  Think about it.  So some low level guy gets dinged 1% on his bonus for not cross selling enough.  But the guy who brings in $50 mil a year, is a raging asshole and everyone knows hoards every single business contact isn't impacted in the least.  If he was, he leaves. 

 

It's like the shell game.  Focusing on these kinds of metrics takes your eyes off the prize.  Just my 2 cents.  You obviously view it differently than me and that's fine.  No worries.

[Tim Eriksen]

In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.

 

No matter public or private, the only cash flow you will receive as an owner or investor (not entirely sure what the difference is) is in the form of dividends/buybacks, is it not? The only benefit you reap from retained earnings profitability reinvested for growth is in the form of a higher overall future valuation - i.e. a terminal value.

 

You are valuing your cash flows while I am valuing the firm's cash flows.

 

What is the difference? Free cash flow to equity holders is the cash flow available to pay dividends, buyback stock, payback debt or reinvest for growth - FCF to equity in its entirety is MY cash flow available for me to do what I want. If I owned 100% of the business then I could decide - rather, as a public shareholder, I elect a board to oversee a management team to hopefully intelligently allocate MY free cash flow.

 

The difference is that your interpretation of your spreadsheet is incorrect.  Let's go back to the point of disagreement which was with the statement that "the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value."  This is not a true statement and leads to wrong conclusions.  The majority of the value of most businesses is actually derived from what happens in the next ~ twelve years.  The present matters much more than twenty years from now.  The terminal value in your spreadsheet increased due to reinvesting the cash flows from the preceding twenty years.  We can clearly see that by changing the payout ratio - increasing it over the next twenty years lowers the terminal value.  Why?  Because the increased terminal value was based on reinvested cash flows from year 1-20. 

 

I'll end this discussion since this off topic from BAC.  I'd be more than happy to continue to discuss it but I don't want to irritate those looking for info on BAC.

 

 

 

[PlanMaestro]

Judge denies AIG motion in BofA $8.5 billion settlement

http://finance.yahoo.com/news/judge-denies-aig-motion-bofa-234551117.html

 

A New York judge on Tuesday rejected an effort by AIG Inc (AIG) and other objectors to Bank of America Corp's (BAC) proposed $8.5 billion mortgage bond settlement to convert the case to a proceeding that may have widened its scope.

....

 

Kapnick said at a hearing on Tuesday that she could accomplish what was necessary under the Article 77. "I really think I have a lot of discretion," she said.

....

 

The judge asked the parties to work out proposals for providing documents. Objectors to the proposed settlement want wide discovery, while the trustee wants less. "Everybody's going to get part of what they want," Kapnick said.

 

 

 

[alertmeipp]

Some of us own BAC, AIG and MBIA. Kind of say to see our companies sue each other. Just because BAC bot the evil CFC doesn't mean companies like MBI and AIG are innocent.

[Guest bengrahamofthenorth]

Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

 

[ERICOPOLY]

Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

 

Most of the consumer debt is mortgage, at historically low fixed rates.  Household debt service is at historically low levels.  Low interest amortizations pay down faster in the early years. 

 

Why is this a cause for concern? 

 

[Guest bengrahamofthenorth]

Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

 

Most of the consumer debt is mortgage, at historically low fixed rates.  Household debt service is at historically low levels.  Low interest amortizations pay down faster in the early years. 

 

Why is this a cause for concern? 

 

 

If the US consumer were to head back to pre2000 levels of debt to income, new loan growth and revenue would be pretty weak for an extended period of time.