BAC-WT - Bank of America Warrants

[Green King]

From the prospectus for the BAC class A tarp warrants -

"The exercise price of the warrants cannot be paid in cash and is payable only by netting out a number of shares of our common stock issuable upon exercise of the warrants equal to the value of the aggregate exercise price of the warrants. The number of shares of our common stock issuable upon exercise of the warrants will be calculated based on the closing price of our common stock on the exercise date. The warrants are currently exercisable and expire on January 16, 2019. See “Auction Process” in this prospectus supplement."

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

Wells warrants are the same -

http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm

 

Hi Sunrider,

 

It's actually 0.375.

 

The warrants can only be exercised cashless.

 

So if the warrants price is $7.50 and the stock price is $20, when you exercise your warrants, you will turn in your warrant, and for each warrant you turn in, Bank of America will issue 0.375 shares (0.375 times $20 is $7.50) to you. 

 

I also like WFC warrants.  Added to the warrants I bought in 2010.

 

I don't like JPM, dumped all my JPM and JPM warrants when I read Tarullo's insistence that gsib surcharge will be incorporated in 2017 stress test.  JPM has the least cushion and the highest surcharge, gonna be toughest for them.

 

Can you tell me where does it say that it's a cashless exercise ? TIA and is it the same for wells Fargo warrant ?

 

Thank you for the help. Cheers

[Crip1]

bought some on Monday and Tuesday....right now getting schlonged...premature accumulation

 

I bought some Tuesday and again today...doubled my position, in fact. So, I feel some of your pain. That said, I can't read the words "... right now getting schlonged..." without cracking up laughing.

 

-Crip

[indirect]

Q4 earning out

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=2130142#fbid=ElCiEbJqe74

[Guest notorious546]

seems like an 10% return is easy to get to for this name. ~5-7% growth in book value/tangible book value, 2-3% dividend yield, then perhaps some minor valuation bump. this would be all without a rate change.

 

i like it.

 

 

[vinod1]

seems like an 10% return is easy to get to for this name. ~5-7% growth in book value/tangible book value, 2-3% dividend yield, then perhaps some minor valuation bump. this would be all without a rate change.

 

i like it.

 

I think you would find the same with any of the big banks and probably some a lot safer.

 

Here is an exercise that you would be helpful (I did this weekend), take a look at all the big banks or the banks you follow, estimate next couple of years earnings conservatively, apply a multiple that is reasonable given the growth and risks (alternatively or in combination, look at the relative PE ratios in the past 10-15 years) and come up with the prices for say year end 2017. If you compare them to the current price, almost all the banks are trading at a very tight range.

 

The cheapest I found are Citi and Capital One. Though not by a whole lot. For Citi, it is almost time for them to get into trouble again, so that is probably warranted.

 

Vinod

[FCharlie]

I don't get the price action.

 

Book Value is $22.54 and rising

 

Stock Price is $14.11 and falling?

 

BAC would need to rise almost 60% just to be at book value.

[Rasputin]

every crisis is a chance for bac to showcase their risk averse culture.

 

wfc - $17 B oil & gas loan outstanding - if oil remain at $30 for 12 mo, expect to lose $1.2 B

jpm - $14 B o&g loan outstanding ($42 B credit exposure) - if oil remain at $30 for 18 mo, expect to lose $0.75 B

bac - $21 B o&g loan outstanding ($46 B credit exposure) - if oil remain at $30 for 27 mo, expect to lose $0.7 B

 

i won't be surprised if 4 years from now, bac will have the lowest annual net charge-offs among the trillionaires. 

[mals]

every crisis is a chance for bac to showcase their risk averse culture.

 

wfc - $17 B oil & gas loan outstanding - if oil remain at $30 for 12 mo, expect to lose $1.2 B

jpm - $14 B o&g loan outstanding ($42 B credit exposure) - if oil remain at $30 for 18 mo, expect to lose $0.75 B

bac - $21 B o&g loan outstanding ($46 B credit exposure) - if oil remain at $30 for 27 mo, expect to lose $0.7 B

 

i won't be surprised if 4 years from now, bac will have the lowest annual net charge-offs among the trillionaires.

 

nice tabulation! is it possible, that the market does not believe BAC's expect to lose number?

although, what is driving the stock price lower is anybody's guess - perhaps that banks will not make money between Fintech and low interest rates.

 

i need to look up if BAC has a good size buy back permission from the Fed gods.

[indirect]

1.2% of shares outstanding were bought back in all of 2015. approximately 134 million shares or 2 billion worth. I thought they had fed approval to buy more.

[Guest notorious546]

1.2% of shares outstanding were bought back in all of 2015. approximately 134 million shares or 2 billion worth. I thought they had fed approval to buy more.

[/quote

 

they had approval for 5.0 billion and ~2.7 billion in dividends.

 

[ERICOPOLY]

People:  the buyback approval is for 12 months, not 9 months.

[indirect]

Then Eric I hope they are buying like crazy.

[ERICOPOLY]

It's such a small buyback approval that it won't be hard to complete this quarter.

 

Not sure why they haven't don't 25% of approval each quarter, but leaving the bulk of it for the last quarter might have been a way to look conservative to the Fed.  Who knows.  The Fed wants the buyback to be something that can be cancelled in the event of downturn -- so front-loading it would make them unhappy, and perhaps back-loading it would have the opposite effect (which may win them a larger approval the following year).

[Rasputin]

BAC bought back exactly the amount they requested and approved by the fed in 2015 CCAR.

 

The Fed approved $4 B buyback over 5 quarters : Q2 2015, Q3 2015, Q4 2015, Q1 2016, Q2 2016.  That's $800 million per quarter in Q2 2015, Q3 2015 and Q4 2015.  Total share buyback for 2015 is $2.4 Billion.  Quarterly dividend or $0.05 per share is roughly $525 million per quarter.  Total dividend for 2015 is $2.1 Billion.  Thus, they returned $4.5 Billion of capital in 2015. 

 

Prior to 2015 CCAR, capital request approval was for 4 quarter period, Q2 through Q1. 

 

However, 2015 CCAR capital request approval was for 5 quarters, Q2 through Q2 due to the 2016 CCAR being pushed back by 1 quarter.  WFC complained that their employees can't enjoy christmas break. 

 

Starting with 2016 CCAR, the fed pushed the stress test back by 1 quarter.  So banks had 5 quarters to build capital between 2015 CCAR and 2016 CCAR.  The stress period this year will begin in Q1 2016 (end of Q4 2015 capital ratios as the starting point) through the end of Q1 2018 (9 quarter stress period).  We won't see DFAST 2016 results until early June 2016, and capital return approved will begin Q3 2016. 

 

[Viking]

The big US banks are certainly in an interesting situation. Litigation risk has largely been put to bed. Loan issues from the 2008 crisis have almost been run off the books; loan book overall is likely of the highest quality it has been in decades (this is my guess). They have been building capital for years and years. They are all starting to earn large amounts on money. Capital return (dividends and buy backs) is just getting started and will improve every year from here.

 

Tailwinds include:

1.) fed raising rates

2.) US economy continues to chug along with 2.5% GDP growth

 

I see three risks:

1.) fed raising rates causes some unexpected chain reaction (dollar appreciation, yuan depreciation, high yield crisis, emerging markets crisis, commodity crisis etc etc).

2.) hard landing in China as they attempt to shift to consumption based economy

3.) US government announces additional taxes on banks linked to size; it is becoming more clear to me that the US government wants the big banks to break up into smaller entities. To motivate the banks the government will continue to hit them with new capital measures linked to size and make it unprofitable for them to operate as they are currently structured. My guess is Citi will be the first to crack and shrink in size because they are already well on there way. I expect JPM to be one of the winners as they will, once again, be well prepared and able to take advantage of the situation.

 

When I weave it all together, based on what we KNOW, at current prices US banks are crazy cheap. Investors will be less patient as we move forward and I could see activist shareholders getting involved to drive 'shareholder value'. My strategy right now is to sit in the weeds and wait (I own equal stakes of JPM and WFC and a little C).

[sswan11]

Another positive Christopher Davis article:

 

http://seekingalpha.com/article/3818206-thing-bank-america?app=1&auth_param=iq1d:1b9sm7q:4994e89d35b625fa14be968914d3a43b&uprof=45#alt2

[Rasputin]

I am not sure any of the US trillionaires is ready for a break-up.

 

As far as 2017 and beyond stress test and capital return, JPM is in the worst possible spot and most prime for reduction in capital return.

 

Please look at Tarullo's November 2014 comment on future stress test incorporating GSIB surcharge. 

 

JPM has the largest GSIB surcharge (although they said they have reduced it to 3.5%) with the lowest capital buffer. 

 

For example:

 

min required CET1 ratio of 4.5% plus GSIB surcharge would be:

 

8% for JPM (assuming management is correct about their current surcharge of 3.5%, otherwise 9% as published by the fed) while 2015 CCAR showed that min JPM CET1 ratio was 5.3% during the stressed period.  That's 2.7% or 3.7% capital gap.

 

7.5% for BAC while 2015 CCAR showed that min BAC CET1 ratio was 6.6% during the stressed period.  That's 0.9% capital gap. 

 

8% for C while 2015 CCAR showed that min C CET1 ratio was 6.4%.  That's 1.6% capital gap.

 

6.5% for WFC while 2015 CCAR showed that min WFC CET1 ratio was 5.5%.  That's 1.0% capital gap. 

 

I dumped all my JPM shares and warrants when I read that Tarullo's surcharge comment back in November 2014. 

 

[mals]

The big US banks are certainly in an interesting situation. Litigation risk has largely been put to bed. Loan issues from the 2008 crisis have almost been run off the books; loan book overall is likely of the highest quality it has been in decades (this is my guess). They have been building capital for years and years. They are all starting to earn large amounts on money. Capital return (dividends and buy backs) is just getting started and will improve every year from here.

 

Your summary suggests that you do not believe that this low margin environment will last for very long, whereas the market appears to be pricing that in...

 

Any views on what is being priced in by the market on the net interest margin front and whether that risk is high or not?

[ERICOPOLY]

summary suggests that you do not believe that this low margin environment will last for very long, whereas the market appears to be pricing that in...

 

Any views on what is being priced in by the market on the net interest margin front and whether that risk is high or not?

 

You couldn't have said that a month ago. 

[Viking]

Rasputin, I will admit that I do not fully understand how all the capital surcharges will play out for any of the banks; definitely in the too hard pile for me. What I do have confidence in is JPM's ability to understand the rules and modify their business over time to be one of the winners. I own Both JPM and Wells Fargo because I think they are both very well managed.

 

Mals, the big banks are finally earning a decent amount of money in the current interest rate environment. My view is they are already quite profitable. Higher interest rates simply makes them more profitable.

 

Mals, currently the big US banks are being priced for very bad things happening (you pick the bad thing because no one know what it will be). FEAR is driving makets right now so I do not expect where stocks are trading to make any sense based on fundamentals.

 

The big banks are accumulating so much capital that shareholders will benefit at some point. The problem right now is there is too much uncertainty and no one can see what the end game looks like (yet). My guess is we are another 2 or 3 years away from really understand how it will all work out; part of the answer will depend on who gets elected to the White House and who controls congress. Part of the answer will depend on how the non-bank parts of the market function in the next crisis (which we may be on the cusp of right now). In a crisis the US government may find out they need the big banks a little more than they thought...

[meiroy]

every crisis is a chance for bac to showcase their risk averse culture.

 

wfc - $17 B oil & gas loan outstanding - if oil remain at $30 for 12 mo, expect to lose $1.2 B

jpm - $14 B o&g loan outstanding ($42 B credit exposure) - if oil remain at $30 for 18 mo, expect to lose $0.75 B

bac - $21 B o&g loan outstanding ($46 B credit exposure) - if oil remain at $30 for 27 mo, expect to lose $0.7 B

 

i won't be surprised if 4 years from now, bac will have the lowest annual net charge-offs among the trillionaires.

 

1. If oil is at 25 or 20 it will be a far larger number. Who knows where oil will be 12 months from now.

2. The "expect to lose" does not mean that that is the actual number they would lose.  I'd fully expect WFC to be more conservative than the other banks and state a higher percentage. The number from BAC seems ridiculously low. Did their "risk averse culture" cause them to have the highest "O&G loan outstanding" according to your numbers?

 

It's a mediocre company worthy of trading, not long term holding.  I wouldn't be surprised that in the next 4 years there is some short term recession, more regulation and more global nonsense.

 

 

[Rasputin]

2.  WFC's much higher loss expectation is not due to conservatism.  It's because the composition of that $17 B and the credit worthiness (or in this case the non credit worthiness) of the borrowers.

 

Matt O'Connor

 

If we could just circle back on some of the energy comments, maybe get the exact underlying balances. You said, first on the energy loans, less than 2% of your total loan book. If you have that exact number? And then, same thing, in terms of some of the fixed income and equity exposure, just to have a sense of the gross energy risk in those three buckets?

 

John Shrewsberry

 

Yes. So I would use $17 billion as outstandings for energy loans. And for securities, call it $2.5 billion which is the sum of AFS securities and nonmarketable securities.

 

Matt O'Connor

 

Okay. And then just remind us on the lending side, the mix of investment grade versus non-investment grade or unrated?

 

John Shrewsberry

 

Yes. I would -- of the $17 billion -- actually the first cut I would give you is upstream, midstream services, because I think that's germane. And I'd tell you that's about one-half upstream and one quarter services and one quarter midstream. And I think for that cut, we've separated out our investment grade component. So that what we're focused on are really the -- call it the BB and down, middle market, private clients.

 

Matt O'Connor

 

Okay. And I'm sorry, of the $17 billion, how much of that piece that you are focused on?

 

John Shrewsberry

 

Well, we're focused on the whole thing. Half of those customers -- one-half of those balances represent E&P companies, upstream companies. One quarter of them represent oilfield services companies and one quarter of them represent pipelines and storage and other midstream activity. And it excludes, what I would describe as investment grade -- diversified, the larger cap companies where we don't view their credit exposure as quite the same.

 

For BAC $21.3 billion:

 

23% E&P companies, 16% oilfield services companies, 26% vertically integrated, 27% refining & marketing, 8% storage, transportation, consumable fuels. 

 

From BAC Q4 2015 CC transcript:

 

The company in the vertically integrated subsector represents $5.8 billion of the energy portfolio. We believe this subsector has a variability to withstand lower oil prices. Nearly 100% of the companies have a market capital of $10 billion or more or they are sovereign owned and the average company has a market cap greater than $60 billion.  Exposure in refining and marketing is also less dependent on oil prices.

 

For all the trillionaires their energy exposure is very small, losses are very manageable. 

 

As far as which trillionaire bank has the most risk averse culture, our opinions don't matter.

 

Those who must be obeyed (the FED) have spoken.  Projected loan losses and loan loss rate in severely adverse condition over 9 quarter stress period (only BAC use the same 9 quarter in stressing their energy portfolio, WFC use 12 mo, JPM use 18 mo) for 2015 DFAST:

 

BAC $45.7 Billion (4.9%)

C $48.3 Billion (7.2%)

JPM $49.7 Billion (6.4%)

WFC $48.8 Billion (5.8%)

[ERICOPOLY]

10.4 billion shares outstanding.  The last $4 drop in the stock amounts to a missing $41.6 billion in earnings after-tax, or $60.28 billion of pre-tax income at 31% tax rate.

 

Don't think the market knows anything it didn't know a month ago.  It's just panic selling in my opinion.

[Crip1]

10.4 billion shares outstanding.  The last $4 drop in the stock amounts to a missing $41.6 billion in earnings after-tax, or $60.28 billion of pre-tax income at 31% tax rate.

 

Don't think the market knows anything it didn't know a month ago.  It's just panic selling in my opinion.

 

 

Stated differently, is BofA worth $40B less than it was a month ago? I cannot think so. At current prices, assuming that B of A common gets back to its 52-week high sometime in the next 35 months, the warrants provide a better return. If B of A common gets to its current BV, then the warrants return twice as much as the common. And, the BV has been growing.

 

 

-Crip

[ERICOPOLY]

Looks like I picked the wrong week: