BAC-WT - Bank of America Warrants

[racemize]

I used to believe this $2.00 a share theory we had, but I don't think I do anymore.  At this point, I think the banks have to be worth TBV--one way or another, they have to make enough money to be worth that value, so that's my anchor point for BAC/C.  I've ridden leaps up to TBV a few times, and am waiting on the full return with my current set.

 

Past that, it's just a multiple of earnings valuation (and not a high one at that).  To get a lot of growth in earnings, interest rates have to rise.  Since these banks are levered to small changes in interest rates, that's kind of the bet once you get to TBV.

 

I've got a large portion of the portfolio in banks at this point.  If/when C hits TBV, I'm out.  BAC maybe I'll half the position at TBV or just over and hope for the interest rate raises to materialize?  JPM warrants, I'm willing to hold for a while yet.  I'm hoping the capital returns are a catalyst to get to those points, but it may be whenever the Fed says the raise will happen. 

[finetrader]

I used to believe this $2.00 a share theory we had, but I don't think I do anymore.  At this point, I think the banks have to be worth TBV--one way or another, they have to make enough money to be worth that value, so that's my anchor point for BAC/C.  I've ridden leaps up to TBV a few times, and am waiting on the full return with my current set.

 

Past that, it's just a multiple of earnings valuation (and not a high one at that).  To get a lot of growth in earnings, interest rates have to rise.  Since these banks are levered to small changes in interest rates, that's kind of the bet once you get to TBV.

 

+1

[meiroy]

The first of the 2016 stress test results comes June 23, only 2 weeks from now.  This is the test that shows capital levels under hypothetical scenario.

 

The second test result is June 29.  This one approves/rejects capital plans of the banks…in other words what levels of dividends/buybacks will be permitted.

 

https://www.federalreserve.gov/newsevents/press/bcreg/20160602a.htm

 

How are you guys feeling about BofA as we approach these important milestones?

 

My guess is that all the banks would have to jump significantly higher this time.

 

[fareastwarriors]

Here's Why Bank of America Is Slashing Up to 8,400 Jobs

 

http://fortune.com/2016/06/15/bank-of-america-job-cuts/

[fareastwarriors]

Why BofA’s Chief Is Optimistic About Big Banks

CEO Brian Moynihan talks about his company and the need for regulatory balance

 

http://www.wsj.com/articles/bofa-chief-gives-the-big-banks-optimistic-view-1466388300

[BRK7]

RESULTS  ---  Dodd-Frank Act Stress Test 2016

 

https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160623a1.pdf

 

[Viking]

Looks like all the big US banks have all the capital they need on their balance sheets; does this mean capital return happens in a meaningful way for BAC and C? If they get approved for payout ratios in excess of 70% of earnings I will be very happy.

[wescobrk]

The Fed is so arbitrary, it's hard to tell.

BAC has failed 3x  (stress tests)since Moynihan took over.

Let's hope this isn't a fourth time.

[redskin]

RESULTS  ---  Dodd-Frank Act Stress Test 2016

 

https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160623a1.pdf

 

BAC has about $30+ billion of excess capital in the severely adverse scenario.  I'm hoping they ask for $12B buyback and $4B dividend.

[FCharlie]

The saddest part of being a long time owner of BAC is that even under the hypothetical GDP of negative 6.25%, the unemployment rate going to 10%, the stock market decline of 50%, house prices declining 25%, commercial real estate prices declining 30%, VIX at 2008 levels, bond spreads at 575 bps, and treasuries at negative 50bps........ BAC was still massively overcapitalized.

 

The Fed will never allow BAC to distribute anything even remotely close to what they could distribute.

 

BAC used to be my largest position by a mile... There's temptation to buy more, but sadly, I'll likely just sit and watch.

[wescobrk]

dow futures down 3.5%

BAC may be back down into the 12's tomorrow

my timing remains perfect

I bought some at $13.75

[meiroy]

dow futures down 3.5%

BAC may be back down into the 12's tomorrow

my timing remains perfect

I bought some at $13.75

 

It's still in panic mode, once the uncertainty is done, central banks speak out and so the S&P might finish the day at -1.5% to -0.3%.

 

This is of course complete nonsense because what do I know.

 

Soros and Druckenmiller yet again get away like bandits.

 

[wescobrk]

No Fed hikes in 2016

The market doesn't look badly priced in relation to zero interest rates.

[fareastwarriors]

The saddest part of being a long time owner of BAC is that even under the hypothetical GDP of negative 6.25%, the unemployment rate going to 10%, the stock market decline of 50%, house prices declining 25%, commercial real estate prices declining 30%, VIX at 2008 levels, bond spreads at 575 bps, and treasuries at negative 50bps........ BAC was still massively overcapitalized.

 

The Fed will never allow BAC to distribute anything even remotely close to what they could distribute.

 

BAC used to be my largest position by a mile... There's temptation to buy more, but sadly, I'll likely just sit and watch.

 

Still is my largest...sigh

[TheAiGuy]

No Fed hikes in 2016

The market doesn't look badly priced in relation to zero interest rates.

 

Nonsense -- BAC is worth at least tangible equity

[wescobrk]

No Fed hikes in 2016

The market doesn't look badly priced in relation to zero interest rates.

 

Nonsense -- BAC is worth at least tangible equity

 

Not sure how you thought I was arguing BAC is overpriced.

I meant the market isn't expensive in relation to zero rates.

[meiroy]

 

Back when I was younger and handsome like ericopoly a panic would have driven BAC to at least 9 pre-market at this point.  It's not even below 13 right now. SAD.

[TheAiGuy]

No Fed hikes in 2016

The market doesn't look badly priced in relation to zero interest rates.

 

Nonsense -- BAC is worth at least tangible equity

 

Not sure how you thought I was arguing BAC is overpriced.

I meant the market isn't expensive in relation to zero rates.

 

Ah, I misread that then -- I read your comment as the pricing doesn't look off (as in, the price is right) relative to interest rates.

[Viking]

The big US banks are very, very profitable. BAC will earn around $14-15 billion this year. A large chunk of that will be coming back to investors via share buy backs and dividends. Next year BAC will likely earn another $14-15 billion and a large chunk of that will be returned to investors.

 

The big US banks are an oligopoly; and they are like a regulated utility. At current prices investors will receive a solid 7-8% annual return (via dividends and share repurchases).

[ScottHall]

The big US banks are very, very profitable. BAC will earn around $14-15 billion this year. A large chunk of that will be coming back to investors via share buy backs and dividends. Next year BAC will likely earn another $14-15 billion and a large chunk of that will be returned to investors.

 

The big US banks are an oligopoly; and they are like a regulated utility. At current prices investors will receive a solid 7-8% annual return (via dividends and share repurchases).

 

7%-8% is not so hot. Many of the smaller banks trade around tangible book and earn 7% on tangible. Those at least have a chance of being bought out for a big premium.

 

I do think the big banks are probably a good investment. I would guess you could get over 7% but what do I know.

[prevalou]

Actually it's 7%-8% through dividends and shares repurchases +growth (part of earnings reinvested)

[ScottHall]

Actually it's 7%-8% through dividends and shares repurchases +growth (part of earnings reinvested)

 

That makes sense.

[TheAiGuy]

As an approximation, if BAC is trading at a discount to tangible book can earn 7-8% on incremental tangible capital invested, then the stock returns are:

 

return = (1 - Payout Rate) * (ROTCE) + (Payout Rate) * ( 1 / PE)

 

which, right now is:

payout_rate = 50%

ROTCE = 7.5%

current_price = $13

 

return = 50% * 7.5% + 50% + ($1.27 / $13) = 8.6%

 

So, you can see returning capital through dividends and buybacks would lead to a higher return than incremental ROTCE

 

If they eventually do get expenses under control and earning something more reasonable on assets, say 0.8% ROA (or less than Citigroup), that translates to something like $16B and a 8.5% ROTCE, or:

 

payout_rate = 75%

 

return = (1 - 75%) * (8.5%) + (75%) * ($1.4 / $13) = 10.2%

 

[Viking]

Later this week when capital return amounts get announced we could be at an inflection point for the big US banks. With DFAST results out the large banks are already clearly over capitalized. This should result in payout ratios this year in excess of 70% and perhaps approaching 80%. In future years payout ratios may get to 100%.

 

The big US banks are among the top profit generators of all US companies; Dick Bove was interviewed on CNBC yesterday and I think he said the 4 big US banks currently rank in the top 10 of all US companies in terms a of total profitability (JPM is #2 behind Apple).

 

The 2008 crisis resulted in massive consolidation in banking in the US. The government then got involved and passed an enormous amount of legislation (Bove calls it nationalization of the banks). The bottom line, the big US banks are effectively an oligopoly. And due to all the regulation they are like a regulated utility; returns are capped but they are still very good.

 

UK exiting Euro is great for big US banks as they will now take business from their weaker UK and Euro banks. In a crisis business will shift to the best capitalized institutions (US banks). Over time talent will follow.

 

Don't get me wrong... The big US banks are not perfect; they have issues. However, looking forward from today, looking at their businesses, their current level of profitability, their capital levels, their ability to continue to morph in response to regulation... Their business is likely going to chug, chug, chug along. Up to now most of the profits have remained in the banks building capital levels; the last couple of years have been especially painful for investors in big banks as profitability has been improving but investors have not been participating as share prices have actually gone down.

 

At some point Mr Market will begin to appreciate the big US banks for what they are (not what that once were). I think that process may happen over the next 12 months and CCAR announcements on Wed may be the start.

[TheAiGuy]

 

UK exiting Euro is great for big US banks as they will now take business from their weaker UK and Euro banks. In a crisis business will shift to the best capitalized institutions (US banks). Over time talent will follow.

 

 

Yeah... so no, that's not going to happen. There are local economies of scale and relationships that are valuable (for random shit like financing medium-size hotel construction in random towns in Germany) that is unlikely to favor American banks over European ones b/c of balance sheet issues.