BAC-WT - Bank of America Warrants

[Viking]

Just finished listening to the Q1 conference call. Key takeaways:

1.) B Moynihan is not a very charismatic speaker (no surprise here). As an investor, this is a little frustrating as Moynihan does struggle to communicate his vision for the bank. J Dimon is the master when it comes to communication.

2.) Moynihan looks to be running the company in a very conservative fashion; again no surprise here. The company had serious issues that it needed time to work through since 2008. They had to be overly cautious with how they ran each of the individual business units. This has reduced profitability but made the underlying business more predictable. In future years as capital levels continue to grow, legal expenses decrease and regulatory issues normalize the bank will be able to take on more risk and earn higher returns; my guess is we are 12 to 24 months away from this getting started.

3.) M Mayo asked point blank what their financial targets were for 2015. Moynihan was clearly annoyed and stated 1% ROA and 12% (or 13%?) return on TBV were their general financial targets. Mayo pushed for timing and Moynihan indicated end of 2016. Q1 came in at 0.6 ROA and 7.6% return on TBV so much more work needs to be done. No surprise here. I think Moynihan is annoyed because Mayo wants certainty (a number and a date) and Moynihan clearly is uncomfortable providing clearer guidance for 2015 given the legacy issues are still being worked through.

4.) the company has now had two quarters with no large legal bills. As a result earnings were decent. This needs to continue and it sounds like it will. This will help with CCAR for next year in two ways; as earnings grow the amount of excess capital will grow and this can be returning the following year (earn it in 2015 and pay it in 2016 like what has just happened with Citi the last year). It sounds like the Fed models are requiring BAC to hold more capital due to the large litigation payouts of the past 6 years; over time as BAC's litigation payout actualizes at a lower level the Fed model will adjust and BAC will be able to return much larger amounts to shareholders. 2016 capital return should be much improved from 2015 and 2017 should be better yet (this will likely take 12 to 24 months to fully play out).

5.) BAC's business model looks to be somewhere in the middle of JPM and Wells Fargo. As a result, it's results will be tied closely to US economic activity and interest rates. US economic activity should be decent moving forward and this will be good for BAC.

6.) interest rates: BAC results will be OK should interest rates go sideways from here. Should interest rates increase BAC profitability will jump. Moving forward, the trend in interest rates will likely impact BAC's share price more than anything. Until expectations for interest rates increase BAC shares will likely not increase much.

7.) Summary: it looks to me like the worst of the litigation risk is behind BAC. GREAT news. We can now expect 2015 to provide a baseline for earnings (likely around $1.30/share). Moving forward (next couple of years) as legacy issues continue to shrink we should see nice growth in earnings. However, until interest rates start to increase the bank likely will not be able to hit its targets of 1% ROA or 12% return on TBV. I will be watching the U.S. economy; if it continues to perform at a decent clip I will be happy to hold BAC as I expect BAC stock to increase in 2015 about as much as BV increases (about $0.30 per quarter).

8.) At end of Q1 TBV is at $14.76 and the stock is trading at about $15.80. Dividend is $0.05/share/quarter (low compared to peers). The $4 billion stock buyback will start in Q2 (over the next 5 quarters) removing some supply of shares from the stock float.

9.) BAC looks to be about 12 months behind Citi and 24 months behind JPM on the capital return front and in putting legacy issues behind it and driving the business forward. As a result I would expect JPM and Citi to outperform BAC in 2015 and for BAC to outperform the other two in 2016.

[mlcglobal]

Great notes Viking. Much appreciated!  8)

[Uccmal]

Not surprising, just fascinating considering that everything that most of us predicted has happened and still the market trades this stock at a gigantic discount to book value.

 

I remember in 2009 when the loan loss provision was $13 Billion per quarter. Today it is less than $1 Billion per quarter.

 

The old loans are mostly gone, litigation is mostly gone, the dividend has moved in the right direction, the company has a $4 billion buyback in place, but even today we can buy at nearly a 40% discount to book value.

 

but isnt that because the company continues to earn 6-7% on equity versus a well fargo earns almost 11%. so as eric said sometime back, maybe this will not reach book till the ROE improves

 

 

I think you are right. I think one of the reasons for the discount is because BAC continues to struggle with a goal of 10% ROE... However, I don't understand the logic of thinking that you can wait until we have a 10% ROE in order to buy the stock. By the time we have a 10% ROE I think book value and the stock price will be much higher.

 

I think the question is not about buying it when it gets to 10%, but if and how long it will take to get to 10%.  Opportunity cost on this stock since it got to $13-15 has been pretty painful.

 

No kidding.  I am fed up.  I am exiting the majority of my Leaps in BAC, opportunistically.  I am not even sure about holding the common since the dividend is so paltry.  The buyback is a disgrace and wont even cover the dilution. 

 

The efficiency ratio is terrible.  Interest rates are not going up anytime soon, and when they do it will be a multiple yr. affair - it wont hit the balance sheet until at least a year from the first increases.  Meanwhile JPM has accepted this. 

 

I think we should use TB Value rather than book.  If WFC and JPM trade at 1.4 x TBV where should BAC trade 1x, 1.1x?  which is right where it is trading.

 

0.35/share x 4 = 1.40 at a PE of 10 - 13 = share price of $14 to $18 - right where it is trading now. 

 

Obviously turning the ship is alot slower than I anticipated.  Removing the litigation overhang has just exposed the franchises defects. 

 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

[CorpRaider]

Yeah, almost makes one want to say spin off Merrill, U.S. Trust, Bank of America, Nations Bank, and First Boston and bring in some hot execs from MS, BK, WFC, USB and JPM to run them and let's see what they can do with it.

[writser]

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Subtle brag.

[rkbabang]

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Subtle brag.

 

Not if this is your largest holding.  As it is mine.

[benchmark]

 

No kidding.  I am fed up.  I am exiting the majority of my Leaps in BAC, opportunistically.  I am not even sure about holding the common since the dividend is so paltry.  The buyback is a disgrace and wont even cover the dilution. 

 

The efficiency ratio is terrible.  Interest rates are not going up anytime soon, and when they do it will be a multiple yr. affair - it wont hit the balance sheet until at least a year from the first increases.  Meanwhile JPM has accepted this. 

 

I think we should use TB Value rather than book.  If WFC and JPM trade at 1.4 x TBV where should BAC trade 1x, 1.1x?  which is right where it is trading.

 

0.35/share x 4 = 1.40 at a PE of 10 - 13 = share price of $14 to $18 - right where it is trading now. 

 

Obviously turning the ship is alot slower than I anticipated.  Removing the litigation overhang has just exposed the franchises defects. 

 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

Yes, there is no short term catalysts for this to move up. I was hoping that they could show much better progress on operational efficiency. Now that the law suits are over, maybe it's time to get a real banker to run the ship, rather that a lawyer.

[fareastwarriors]

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Subtle brag.

 

Not if this is your largest holding.  As it is mine.

 

Same here.  All my holdings (except oil/gas-related stocks) are pretty much near their highs as the market continue to grind up.

 

With that said, I added more to BAC position yesterday...

[pabraifan]

 

No kidding.  I am fed up.  I am exiting the majority of my Leaps in BAC, opportunistically.  I am not even sure about holding the common since the dividend is so paltry.  The buyback is a disgrace and wont even cover the dilution. 

 

The efficiency ratio is terrible.  Interest rates are not going up anytime soon, and when they do it will be a multiple yr. affair - it wont hit the balance sheet until at least a year from the first increases.  Meanwhile JPM has accepted this. 

 

I think we should use TB Value rather than book.  If WFC and JPM trade at 1.4 x TBV where should BAC trade 1x, 1.1x?  which is right where it is trading.

 

0.35/share x 4 = 1.40 at a PE of 10 - 13 = share price of $14 to $18 - right where it is trading now. 

 

Obviously turning the ship is alot slower than I anticipated.  Removing the litigation overhang has just exposed the franchises defects. 

 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

Yes, there is no short term catalysts for this to move up. I was hoping that they could show much better progress on operational efficiency. Now that the law suits are over, maybe it's time to get a real banker to run the ship, rather that a lawyer.

 

Instead of taking responsibility, Moynihan has become chairman to be more "conservative" and keep his job as long as possible. Want some result? Put his job on the line as Citigroup CEO.

If shareholders want someone only cutting costs and be conservative, hiring an accountant as CEO. CEOs should be taking smart risk as CEO at Wells Fargo

 

[Uccmal]

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Subtle brag.

 

No its frustration.

[simplefocus]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share. 

[kevin4u2]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true? 

[FCharlie]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share.

 

Because of this, I think a great strategy is to own the stock, short ATM puts and short OTM calls.

 

 

[FCharlie]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true?

 

One year ago, April 30, 2014, when BAC suspended it's previous buyback, it had 10.515 million shares outstanding

 

With no buyback in place, the share count rose to 10.516 by July 2014 and 10.519 by Feb, 2015.

 

In other words, dilution increased the share count by four million shares over the course of a year. The current buyback should extinguish about that many shares per week if it's done at a ratable pace over five quarters.... so I think his buyback comment is untrue.

 

 

[boilermaker75]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share.

 

Because of this, I think a great strategy is to own the stock, short ATM puts and short OTM calls.

 

Exactly what I have been doing. I have been writing ATM puts, my highest strike price has been 17, and turning around and writing covered calls if put to. So I do have some BAC that I was put to at 17, but I have also written covered calls a few times on that position. Currently I am short 15, 15.5, and 16 strike options, a combination of puts and covered calls.

[Uccmal]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true?

 

Look back a few years.  Share count rises alot every year, except last year. 

[CorpRaider]

 

No kidding.  I am fed up.  I am exiting the majority of my Leaps in BAC, opportunistically.  I am not even sure about holding the common since the dividend is so paltry.  The buyback is a disgrace and wont even cover the dilution. 

 

The efficiency ratio is terrible.  Interest rates are not going up anytime soon, and when they do it will be a multiple yr. affair - it wont hit the balance sheet until at least a year from the first increases.  Meanwhile JPM has accepted this. 

 

I think we should use TB Value rather than book.  If WFC and JPM trade at 1.4 x TBV where should BAC trade 1x, 1.1x?  which is right where it is trading.

 

0.35/share x 4 = 1.40 at a PE of 10 - 13 = share price of $14 to $18 - right where it is trading now. 

 

Obviously turning the ship is alot slower than I anticipated.  Removing the litigation overhang has just exposed the franchises defects. 

 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

Yes, there is no short term catalysts for this to move up. I was hoping that they could show much better progress on operational efficiency. Now that the law suits are over, maybe it's time to get a real banker to run the ship, rather that a lawyer.

 

Hell, they just gave him the combined CEO Chairman gig like he's done something great or he's James Freaking Dimon.  Oh yeah, I've been crushing it too lately, excepting this huge albatross.  Heck even O&G is treating me ok lately; I just sold my CRC for double in like 3 months.  QVAL is doing well, Magic Formula is smoking it lately and yet Moynihan still speaks English like a first year exchange student from Zaire.

[morningstar]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true?

 

Look back a few years.  Share count rises alot every year, except last year.

 

BAC sharecount is roughly the same as it was end of 2011 at 10.5bn - down about 0.2% in a little over 3 years - despite a pretty minimal amount of buyback activity over this period, $4.9bn total. This year's buyback should easily more than offset dilution, which just isn't very significant.

 

12/31/11 sharecount - 10.5359 bn; 3/31/15 sharecount - 10.5204 bn

[Uccmal]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true?

 

Look back a few years.  Share count rises alot every year, except last year.

 

BAC sharecount is roughly the same as it was end of 2011 at 10.5bn - down about 0.2% in a little over 3 years - despite a pretty minimal amount of buyback activity over this period, $4.9bn total. This year's buyback should easily more than offset dilution, which just isn't very significant.

 

12/31/11 sharecount - 10.5359 bn; 3/31/15 sharecount - 10.5204 bn

 

Table 7: BAc 2014 report

 

Diluted

2011 - 10255

2012 - 10842

2013 - 11491

2014 - 10585

 

Non-diluted

2011-10,143

2012- 10,746

2013- 10,731 (With a full yr. of buybacks)

2014- 10,528 (a couple B buybacks)

 

Add 400 million shares at 13 per share ~ 5 Billion dilution while buybacks have been going on.

 

Thats alot of dilution in my book.  I would rather see the 0.40 cents per share as a dividend.  Nuff said.

 

 

 

[morningstar]

The buyback is a disgrace and wont even cover the dilution. 

 

Edit: I am pretty grumpy - every single one of my holdings except this is up.

 

Is your buyback comment true?

 

Look back a few years.  Share count rises alot every year, except last year.

 

BAC sharecount is roughly the same as it was end of 2011 at 10.5bn - down about 0.2% in a little over 3 years - despite a pretty minimal amount of buyback activity over this period, $4.9bn total. This year's buyback should easily more than offset dilution, which just isn't very significant.

 

12/31/11 sharecount - 10.5359 bn; 3/31/15 sharecount - 10.5204 bn

 

Table 7: BAc 2014 report

 

Diluted

2011 - 10255

2012 - 10842

2013 - 11491

2014 - 10585

 

Non-diluted

2011-10,143

2012- 10,746

2013- 10,731 (With a full yr. of buybacks)

2014- 10,528 (a couple B buybacks)

 

Add 400 million shares at 13 per share ~ 5 Billion dilution while buybacks have been going on.

 

Thats alot of dilution in my book.  I would rather see the 0.40 cents per share as a dividend.  Nuff said.

 

You basically just disagree with one decision over that period, the capital raising actions in 2011, which accounts for virtually everything happening in the table above. Since mid-2012 they have been steadily reducing share count as possible and it would be hard to argue they have done anything remotely dilutive. Rather the opposite as compensation strategies have become less dilutive. Of course, diluted share count has often risen as the stock price and earnings have gone up - but that's a good thing for investors.

 

You might also feel that they should have asked for more capital return in the CCAR process, but personally I doubt they left very much on the table there.

[writser]

* controversial *

 

I'm long and I really don't get all the BM hate. We are just a few years past the biggest crisis of our lives after which we collectively wanted to hang all bankers for almost blowing up our society but now, after one year of stock underperformance, the complaining starts. "All my stocks doubled except for BAC. Moynihan lacks charisma. We need a real banking CEO who takes risks. Return more capital!". New bull market, lessons forgotten.

 

As far as I am concerned they are doing ok. Slow but steady. Yes - it is a boring stock now with no catalyst in sight. If you don't like that, buy TSLA.

[benchmark]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share.

 

Because of this, I think a great strategy is to own the stock, short ATM puts and short OTM calls.

 

Exactly what I have been doing. I have been writing ATM puts, my highest strike price has been 17, and turning around and writing covered calls if put to. So I do have some BAC that I was put to at 17, but I have also written covered calls a few times on that position. Currently I am short 15, 15.5, and 16 strike options, a combination of puts and covered calls.

 

Can you share some details about the strategy? i.e., how do you pick which ATM put to sell and OTM call to sell -- what time frame do you typically work with, etc.? TIA

[FCharlie]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share.

 

Because of this, I think a great strategy is to own the stock, short ATM puts and short OTM calls.

 

Exactly what I have been doing. I have been writing ATM puts, my highest strike price has been 17, and turning around and writing covered calls if put to. So I do have some BAC that I was put to at 17, but I have also written covered calls a few times on that position. Currently I am short 15, 15.5, and 16 strike options, a combination of puts and covered calls.

 

Can you share some details about the strategy? i.e., how do you pick which ATM put to sell and OTM call to sell -- what time frame do you typically work with, etc.? TIA

 

I have a few thousand shares of common BAC. I sell ATM puts or just below. Any puts with a few months or so until expiration will have good time value and good time decay. Then I sell OTM calls six months to a year out. The idea is that there is a pretty solid floor at tangible book value, a floor that is rising with each passing quarter. Now there is buyback support. If the stock drops hard near expiration, you can always roll it forward and collect more premium while you wait for the price to recover. The reason I sell OTM calls is because the stock is too diluted to move very far very fast. I've made more money selling the options than owning the shares... which probably helps me to not be so frustrated with the opportunity cost and how slow this thing moves.

[boilermaker75]

BAC is just one of those investments where it has very limited or no downside, except for opportunity cost.  I can't imagine it will still be trading at $15~ in 2 years from now.  My fair value per share for 2015 is ~18, and 2016 ~24 per share.

 

Because of this, I think a great strategy is to own the stock, short ATM puts and short OTM calls.

 

Exactly what I have been doing. I have been writing ATM puts, my highest strike price has been 17, and turning around and writing covered calls if put to. So I do have some BAC that I was put to at 17, but I have also written covered calls a few times on that position. Currently I am short 15, 15.5, and 16 strike options, a combination of puts and covered calls.

 

Can you share some details about the strategy? i.e., how do you pick which ATM put to sell and OTM call to sell -- what time frame do you typically work with, etc.? TIA

 

I have a few thousand shares of common BAC. I sell ATM puts or just below. Any puts with a few months or so until expiration will have good time value and good time decay. Then I sell OTM calls six months to a year out. The idea is that there is a pretty solid floor at tangible book value, a floor that is rising with each passing quarter. Now there is buyback support. If the stock drops hard near expiration, you can always roll it forward and collect more premium while you wait for the price to recover. The reason I sell OTM calls is because the stock is too diluted to move very far very fast. I've made more money selling the options than owning the shares... which probably helps me to not be so frustrated with the opportunity cost and how slow this thing moves.

 

I sell slightly OTM puts with as short a time to expiration as possible so as to get at least $0.15 per share. So the time frame is often from less than a week to about two weeks. I try to do the same with the covered calls. With positions I have been put to I sometimes have to write longer time frames to get my > $0.15 per share. Currently I have some positions where I was put to at $17 per share. I currently do not have calls written against those shares.

[benchmark]

 

I sell slightly OTM puts with as short a time to expiration as possible so as to get at least $0.15 per share. So the time frame is often from less than a week to about two weeks. I try to do the same with the covered calls. With positions I have been put to I sometimes have to write longer time frames to get my > $0.15 per share. Currently I have some positions where I was put to at $17 per share. I currently do not have calls written against those shares.

 

Why $0.15 as the threshold? For example, BAC April 24th $15.5 put is now at $0.15?