BAC-WT - Bank of America Warrants

[Rasputin]

The last time BAC was at $13, was in 2013.  So I've compared 2013 vs 2015.

 

I will start with core earnings.

 

2013 reported net income applicable to common shareholders : $10.1 B

2013 reserve releases : $3 B (subtract)

2013 Global Market adjustment (FVA, DVA) : $1.4 B

2013 Litigation expenses minus $2 B per year : $2.8 B

2013 Gain on security sale and equity investment income : $2.9 B (subtract)

2013 UK payment protection charge : $0.1 B

2013 Market related adjustment to NII : $0.34 B

2013 Amortization of intangibles : $0.66 B

2013 Core earnings : $9.5 B

 

Include management's BAC 1+2 cost reduction ($1.8 B) plus LAS expense of $500million/q ($4.8B), 2013 Earnings power = $16.1 B or roughly $1.4 per share with 11.5 B sh outstanding.

 

2015 Reported net income applicable to common shareholders : $14.41 B

2015 Reserve releases : $0.5 B (subtract)

2015 Global market adjustment (FVA/DVA) : $0.55 B

2015 Gain on security sale & equity investment income : $0.96 B (subtract)

2015 Gain on NPL sale : $0.10 B (subtract)

2015 Gain on residential mortgage sale : $0.62 B (subtract)

2015 UK payment protection charge : $0.23 B

2015 UK tax charge : $0.3 B

2015 Market related adjustment to NII : $0.24 B

2015 Amortization of intagibles : $0.59 B

2015 Benefit to R&W provisions : $0.14 B (subtract)

2015 Trups redemption charge : $0.41 B

2015 Core earnings : $14.4 B

 

Include management's LAS expense of $500 million/quarter ($1.1 B), 2015 Earnings power $15.5 B or roughly $1.39 per share with 11.15 B shares outstanding. 

 

Earnings power stagnated between 2013 to 2015.  Main reason is compression of NIM from 2.37% in 2013 to 2.2% in 2015.  GAAP net interest income went from $42.265 B in 2013 to $39.9 B (excluding the $0.6 B trups redemption charge).  LCR played an important part in NIM compression in 2015 and management is done with the NIM reducing ALM activities to meet LCR requirement due 2017.  Offsetting this decline is cost reduction in core operating expenses (non LAS, non litigation) from $54.2 B in 2013 to $52.4 B in 2015. 

 

Balance sheet wise:

TCE 12/31/2013 $146 B

TCE 12/31/2015 $162 B

NPL+foreclosed 12/31/2013 $17.8 B

NPL+foreclosed 12/31/2015 $ 9.8 B

Avg deposit 2013 $1.09 T

Avg deposit 2015 $1.16 T

Avg loans & leases 2013 $919 B

Avg loans & leases 2015 $882 B

Avg core loans & leases (ex LAS, ex All Other) 2013 $646 B

Avg core loans & leases (ex LAS, ex All Other) 2015 $705 B

Avg long term debt 2013 $263.4 B

Avg long term debt 2015 $240.1 B

60+day delinquent in servicing portfolio was 300k units by Q4 2013

60+day delinquent in servicing portfolio was 103k units by Q4 2015

Liquidity in Q4 2013 was $376 B

Liquidity in Q4 2015 was $504 B

 

Conclusion:

 

Between 2013 and 2015, stagnant core earnings power, less risky balance sheet, reduced litigation risk and mortgage putback risk, higher liquidity, higher capital, similar stock price. 

[TorontoRaptorsFan]

Thank you Rasputin.

 

That was very helpful.

[Hoodlum]

 

Include management's BAC 1+2 cost reduction ($1.8 B) plus LAS expense of $500million/q ($4.8B), 2013 Earnings power = $16.1 B or roughly $1.4 per share with 11.5 B sh outstanding.

 

 

I can't quite figure out how you came to $4.8B and then $16.1B.  Was the $1.8B double counted?

[vinod1]

I moved part of a company retirement account to a rollover IRA just to buy more BAC today. I wanted the extra asset protection offered by the company retirement plan but with BAC again at this level, it is too tempting to pass up. 

 

Vinod

[Rasputin]

 

Include management's BAC 1+2 cost reduction ($1.8 B) plus LAS expense of $500million/q ($4.8B), 2013 Earnings power = $16.1 B or roughly $1.4 per share with 11.5 B sh outstanding.

 

 

I can't quite figure out how you came to $4.8B and then $16.1B.  Was the $1.8B double counted?

 

Hi Hoodlum,

 

Sorry I was not clear. 

 

The $4.8 B is further reduction in LAS non litigation operating expense from 2013 level to the $0.5 B/quarter goal. 

 

Q1 2013 LAS expense was $2.6 B.  Further expense reduction of $2.1 B times 0.69 (31% tax rate in$ Q1 13) = $1.45 B

Q2 2013 LAS expense was $2.3 B.  Further expense reduction of $1.8 B times 0.69 = $1.24 B

Q3 2013 LAS expense was $2.2 B.  Further expense reduction of $1.7 B times 0.69 = $1.17 B

Q4 2013 LAS expense was $1.8 B.  Further expense reduction of $1.3 B times 0.69 = $0.9 B

Total further Las expense reduction from 2013 level to $2 B/year goal = $4.8 B

 

The math is similar with the BAC 1 & 2 project (new BAC) cost reduction.  But for new BAC, management doesnt give out quarterly info.  So I had to estimate from the conference call.  For example, they'd say at the end of Q4 2012, they have achieved $900 million/quarter cost reduction due to new BAC.  Their goal at the end of Q4 2013 was to achieve $1.5 Billion/quarter cost reduction with ultimate goal of reducing cost by $2 Billion/quarter. 

 

My estimate is as follows:

End of Q1 2013, they achieved $1.2 B cost reduction.  $0.8 B to go times 0.69 = $0.55 B

End of Q2 2013, they achieved $1.3 B cost reduction.  $0.7 B to go times 0.69 = $0.48 B

End of Q3 2013, they achieved $1.45 B cost reduction.  $0.55 B to go times 0.69 = $0.38 B

End of Q4 2013, they achieved $1.5 B cost reduction. $0.5 B to go times 0.69 = $0.35 B

 

Add them all up, another $1.8 B further cost reduction from BAC 1+2 (new BAC) from the 2013 level to the $2 B/quarter goal. 

 

[Rasputin]

BAC scheduled to deposit the $8.5 B settlement by Feb 10

 

http://blogs.reuters.com/alison-frankel/2016/02/05/8-5-billion-payout-remains-elusive-for-bofa-mbs-investors/

[Rasputin]

I moved part of a company retirement account to a rollover IRA just to buy more BAC today. I wanted the extra asset protection offered by the company retirement plan but with BAC again at this level, it is too tempting to pass up. 

 

Vinod

 

I agree.  Who buys 10 yr Treasury at 1.85% when BAC is yielding 3.1% already (div+stock buyback for 2015) with that 3.1% about to grow to 4.8% (if they request $7 B for 2016 ccar), and keep growing every year. 

 

BTW, BAC treats their stock with reverence.  Their net to gross stock buyback is the highest among BAC, WFC, JPM.  They settle vested stock in cash (that's the $1 B every year in Q1 charge). 

[Viking]

Rasputin, thanks for clarifying how BAC settles vested stock. One complaint I have with JPM is the benefit of their published total stock buyback figures is diluted greatly because they issue so much stock internally.

[Marve2013]

Hi - many thanks for your thoughts.  It really helps to see from many angles.

 

Just wondering how you guys factor in the issue of even higher capital requirements (in addition to what's already there).

 

(sharing an article which I believe most of you have already read ... but just in case)

 

http://www.reuters.com/article/us-usa-fed-rosengren-idUSKCN0VD0MK

 

When I think of good investors like Bruce Berkowitz or Monish Pabrai who have bought and sold out (despite suggesting that banks should be trading at higher than 1.5xTBV) - it doesn't make sense to me why they would sell out so early.  Bruce Berkowitz had a price target for BAC of $35-40.  Banks have finally gotten through the legal battles and buffered up enough capital and liquidity as per the Fed's requirement.  Clean, sustainable earnings are finally coming thru. 

 

It only leaves me to think that they must've been wary of the risks of even higher capital requirements  ... and that perhaps all this election talk would also unnecessarily create a drag on prices for a while (with the risk of even more regulations also very real possibility).

 

So yes ... earnings are back and the Banks are trading at very low multiples.  But with higher capital requirements, more severe stress tests, and potential risk of regulations ... how do you guys work that out? 

 

Many thanks for your thoughts. 

 

 

 

[Rasputin]

Hi - many thanks for your thoughts.  It really helps to see from many angles.

 

Just wondering how you guys factor in the issue of even higher capital requirements (in addition to what's already there).

 

(sharing an article which I believe most of you have already read ... but just in case)

 

http://www.reuters.com/article/us-usa-fed-rosengren-idUSKCN0VD0MK

 

When I think of good investors like Bruce Berkowitz or Monish Pabrai who have bought and sold out (despite suggesting that banks should be trading at higher than 1.5xTBV) - it doesn't make sense to me why they would sell out so early.  Bruce Berkowitz had a price target for BAC of $35-40.  Banks have finally gotten through the legal battles and buffered up enough capital and liquidity as per the Fed's requirement.  Clean, sustainable earnings are finally coming thru. 

 

It only leaves me to think that they must've been wary of the risks of even higher capital requirements  ... and that perhaps all this election talk would also unnecessarily create a drag on prices for a while (with the risk of even more regulations also very real possibility).

 

So yes ... earnings are back and the Banks are trading at very low multiples.  But with higher capital requirements, more severe stress tests, and potential risk of regulations ... how do you guys work that out? 

 

Many thanks for your thoughts.

 

Hi Marve,

 

I don't know why other people sell their holdings.  For me personally, speaking as an investor who intend to own BAC for a long time, I love the regulations, higher capital requirements and stress tests that continue to get tougher.  Combined, they make BAC safer, they make BAC's profit more core, more sustainable, they make BAC's dividend safer, etc. 

 

I am hopeful they would incorporate GSIB surcharge into stress test.  I am hopeful this would force pricing for market services even higher.  Jamie Dimon mentioned that pricing is already moving up.  With European banks retreating, GSIB surcharge into stress test, pricing hopefully would go up even more. 

 

BAC's global market is the worst in terms return on capital (ROA, ROTCE, whichever metric you like).  It has the highest risk in terms of rogue trader, litigation risk, reputational risk, etc. 

Global market employees are way over-paid.  I actually would love it if BAC is forced to break up and spin-off/sell its global market division.  I wouldn't mind at all if global banking goes along with global market. 

 

BAC's community banking and wealth investment management are the best in the world.  Their community banking income, in my opinion, has the highest earnings quality since it's not dependent on mortgage banking income, it forgoes a lot of fees with its preferred reward program thus creating a better mouse trap for retail deposit, stickiest deposit base.  I think we will see much higher stock price if BAC is forced to break up.  The community banking + wealth investment management will get a much higher multiple.  These divisions alone would command higher stock price than $13.  CCAR will find these divisions so favorable that they will be allowed for a capital payout ratio that's higher than WFC's.  This is actually my dream :) 

 

 

[Gamecock-YT]

Hi - many thanks for your thoughts.  It really helps to see from many angles.

 

Just wondering how you guys factor in the issue of even higher capital requirements (in addition to what's already there).

 

(sharing an article which I believe most of you have already read ... but just in case)

 

http://www.reuters.com/article/us-usa-fed-rosengren-idUSKCN0VD0MK

 

When I think of good investors like Bruce Berkowitz or Monish Pabrai who have bought and sold out (despite suggesting that banks should be trading at higher than 1.5xTBV) - it doesn't make sense to me why they would sell out so early.  Bruce Berkowitz had a price target for BAC of $35-40.  Banks have finally gotten through the legal battles and buffered up enough capital and liquidity as per the Fed's requirement.  Clean, sustainable earnings are finally coming thru. 

 

It only leaves me to think that they must've been wary of the risks of even higher capital requirements  ... and that perhaps all this election talk would also unnecessarily create a drag on prices for a while (with the risk of even more regulations also very real possibility).

 

So yes ... earnings are back and the Banks are trading at very low multiples.  But with higher capital requirements, more severe stress tests, and potential risk of regulations ... how do you guys work that out? 

 

Many thanks for your thoughts.

 

Hi Marve,

 

I don't know why other people sell their holdings.  For me personally, speaking as an investor who intend to own BAC for a long time, I love the regulations, higher capital requirements and stress tests that continue to get tougher.  Combined, they make BAC safer, they make BAC's profit more core, more sustainable, they make BAC's dividend safer, etc. 

 

I am hopeful they would incorporate GSIB surcharge into stress test.  I am hopeful this would force pricing for market services even higher.  Jamie Dimon mentioned that pricing is already moving up.  With European banks retreating, GSIB surcharge into stress test, pricing hopefully would go up even more. 

 

BAC's global market is the worst in terms return on capital (ROA, ROTCE, whichever metric you like).  It has the highest risk in terms of rogue trader, litigation risk, reputational risk, etc. 

Global market employees are way over-paid.  I actually would love it if BAC is forced to break up and spin-off/sell its global market division.  I wouldn't mind at all if global banking goes along with global market. 

 

BAC's community banking and wealth investment management are the best in the world.  Their community banking income, in my opinion, has the highest earnings quality since it's not dependent on mortgage banking income, it forgoes a lot of fees with its preferred reward program thus creating a better mouse trap for retail deposit, stickiest deposit base.  I think we will see much higher stock price if BAC is forced to break up.  The community banking + wealth investment management will get a much higher multiple.  These divisions alone would command higher stock price than $13.  CCAR will find these divisions so favorable that they will be allowed for a capital payout ratio that's higher than WFC's.  This is actually my dream :)

 

Consumer banking and GWIM, please.  ;)

[Rasputin]

Rasputin, thanks for clarifying how BAC settles vested stock. One complaint I have with JPM is the benefit of their published total stock buyback figures is diluted greatly because they issue so much stock internally.

 

Yes.  Below are # of sh repurchased and issued for 2013 and 2014 for both jpm and bac

 

JPM #sh repurchased 2013 : 96.1 millions

JPM #sh issued 2013 : 48.2 millions

JPM #sh repurchased 2014 : 82.3 millions

JPM #sh issued 2014 : 41 millions

 

BAC #sh repurchased 2013 : 231.7 millions

BAC #sh issued 2013 : 45.3 millions

BAC #sh repurchased 2014 : 101.1 millions

BAC #sh issued 2014 : 25.9 millions

 

I'm waiting for 2015 10K to get full 2015 numbers.  BAC issued much less stock in 9 mo 2015 vs 9 mo 2014 (4 millions vs 25.2 millions). 

 

 

[Marve2013]

Thank you again for sharing your thoughts ...

 

No doubt that the banking system is much safer.  It's just that with the higher capital requirements ... well, one can think of it like additional CAPEX.  Distributable earnings are much less ... then who knows when the countercyclical capital buffers kick in as well ...

 

Like you, I do hope (and think it's fair) that some of the additional cost gets passed to the clients as well.  Banks have shouldered more than their fair share of the extra burden.  But I highly doubt how much can be passed along ... before clients start to seek other avenues

 

 

[Viking]

Rasputin, I think your wish for BAC has a good chance of becoming reality. Over the past 2 years all the big banks have seen an evolving regulatory framework; my guess is they are all waiting for the dust to settle as to what the final rules will look like. They are likely well along in the planning stages as to what they need to do as the new rules are confirmed.

 

My guess is we will see some banks exit whole lines of businesses and it makes sense to me that BAC will be a seller. Other banks will be buyers; I would put JPM in this bucket.

 

I am confident that once the rules are set (and we know who the next President will be and what Congress looks like) the big banks will morph one more time with some growing and some shrinking.

 

Timing will be very hard to predict so as an investor having a 3-5 year time horizon will be key.

[Rasputin]

Thank you again for sharing your thoughts ...

 

No doubt that the banking system is much safer.  It's just that with the higher capital requirements ... well, one can think of it like additional CAPEX.  Distributable earnings are much less ... then who knows when the countercyclical capital buffers kick in as well ...

 

Like you, I do hope (and think it's fair) that some of the additional cost gets passed to the clients as well.  Banks have shouldered more than their fair share of the extra burden.  But I highly doubt how much can be passed along ... before clients start to seek other avenues

 

yes the undistributable nature of higher capital requirements is similar to additional maintenance capex.  unlike maintenance capex, the cash stays within the firm, i.e., it's not spent.  It is moat widening, especially between US banks and non US banks. 

 

I am hopeful that at some point, 2020 or beyond, we'll get to a point where the banks can start requesting closer to 100% capital payout ratio. 

[Rasputin]

Rasputin, I think your wish for BAC has a good chance of becoming reality. Over the past 2 years all the big banks have seen an evolving regulatory framework; my guess is they are all waiting for the dust to settle as to what the final rules will look like. They are likely well along in the planning stages as to what they need to do as the new rules are confirmed.

 

My guess is we will see some banks exit whole lines of businesses and it makes sense to me that BAC will be a seller. Other banks will be buyers; I would put JPM in this bucket.

 

I am confident that once the rules are set (and we know who the next President will be and what Congress looks like) the big banks will morph one more time with some growing and some shrinking.

 

Timing will be very hard to predict so as an investor having a 3-5 year time horizon will be key.

 

Hi Viking,

 

JPM won't be in any position to buy BAC's global market / global banking divisions.  They are too big for any US banks to absorb. If separation is required, it's more likely that it will be spun-off with additional capital raise required.  If you look at JPM's 2015 CCAR results, their minimum capital ratios are very thin.  I think people focus too much on reported capital ratios.  The binding constraint on any large US banks are CCAR capital ratios at minimum point. 

[fareastwarriors]

At this rate, we going to hit the $11 handle.

[ERICOPOLY]

At this rate, we going to hit the $11 handle.

 

Sure, over the next two days.  But how about after that?

[Rasputin]

BAC is buying back $10 million worth of shares per trading day.  Soon they can buy back 1 million shares per day :) 

[ERICOPOLY]

Returning a lot of cash to shareholders might not be a market-calming moment if these banks are increasingly getting priced for disaster.

[Cardboard]

With all due respect Ericopoly, I do not understand why you are seemingly joining the panicking crowd. Especially with your abilities to smartly hedge your positions.

 

You had a solid thesis for BAC generating $2 in EPS under a conservative scenario. I am more in the $1.75 camp based on what they have been achieving over the past 2 years and the on-going dilution to compensate employees.

 

The stock is at $12.20 giving it a pretty low P/E ratio for a bank that seems overcapitalized. While I have sold BAC almost 2 years ago because I was unimpressed with their progress/lack of earnings growth, it is turning again into a deep value play with issues almost all behind them.

 

Sure the stock can go down more but, it would seem crazy to come anywhere close to the $5 level of late 2011 or even touch Buffett's $7.14 preferred conversion price. That would assume that we are entering some form of depression.

 

While some people including Soros and some on this board are enjoying the market going down, we must be getting close to the point where the Fed and others will intervene to calm down markets. It was fun when the impact was only felt by commodity producers or some Chinese firms but, now that the mighty IYF is plunging fast and possibly triggering a panic cascading effect, some will take notice. After spending trillions of $ to save the financial market are they going to abandon now and let all hell break loose?

 

Cardboard

[Rasputin]

Returning a lot of cash to shareholders might not be a market-calming moment if these banks are increasingly getting priced for disaster.

 

i don't want the market to be calm.  i haven't been this excited since 2011/2012.  let me enjoy this for a while. 

[ERICOPOLY]

There was at least a household name you could put on the pullback in 2011.  Grexit, or whatever the household word for it was.  A clearly identifiable "event" that was going to lead to systemic failure of European banks who are counter party to BAC.  So that was when BAC hit $5 -- it was when Bass was saying that Greece would go down within a week or two.  Soon after, the ECB acted and BAC lifted off.

 

The funny thing about this current pullback is that there is a separate thread to speculate on what is causing the European banks to go down.  There is no leading theory yet for the front page.  I think that's why I find it unsettling.  The leading theory could easily put the stock at $10.  There isn't much reason for it to be at $12 unless you believe in the risk of systemic banking failure in Europe and possible counter party failure, or large loan losses from recession.

 

This thing is, the stock has already entered the silly season.  What's $10 when you've already gone down to $12?  Another year of higher capital requirements and a somewhat deeper recession? 

 

Oh well.  Market goes up, market goes down.

[Picasso]

For what it's worth, I have a buddy who works in the capital markets for one of these big banks (BAC, WFC, JPM, not going to say who) and they have received notice that they're getting hit with defaults on credit they didn't see as "direct" energy exposure in markets they least expected.  As a result they're heavily reviewing a lot of these loans and shutting down new lending on anything that might have any kind of energy exposure even in diversified economies.  It's not that great out there and I'd expect further hits to what they've already hinted as "energy" exposure.

[ERICOPOLY]

The newspapers remain fairly calm.  Waiting for this scene to unfold and I don't think we're close:

 

 

Of course, speculation.