BAC-WT - Bank of America Warrants

[Viking]

AiGuy, I agree with you; I am not expecting a big or rapid shift. My thinking is the current weakness and uncertainty will hurt the UK and Euro banks and their competitive position over time. The last couple of years has been quite painful for investors in US banks. The good news is they are now very well capitalized and much better positioned to weather the current Brexit storm. I expect that Brexit will allow them to slowly grow share versus UK and Euro banks in areas where they compete.

[TheAiGuy]

AiGuy, I agree with you; I am not expecting a big or rapid shift. My thinking is the current weakness and uncertainty will hurt the UK and Euro banks and their competitive position over time. The last couple of years has been quite painful for investors in US banks. The good news is they are now very well capitalized and much better positioned to weather the current Brexit storm. I expect that Brexit will allow them to slowly grow share versus UK and Euro banks in areas where they compete.

 

Yeah, at the margin that should happen. I would expect Wells to take US IB business from Barclays (net) over the coming years, for example.

[redskin]

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.

 

Didn't BAC payout 100% through buybacks and dividends after the 2015 CCAR?  Why wouldn't it be 100% of last years profit ($16 billion)?

[Viking]

redskin, last year BAC paid out much less than what they earned. over the past 4 quarters they have returned something in the range of $6 billion (not close to $15). If the Fed approves them to pay out 100% of earnings they will offer a 'yield' of about 10% which would be crazy. And for BAC (and especially Citi) the stock they buy back would be below TBV which would be very good for shareholders. My guess is as much larger payouts get approved Mr Market will finally take notice and shares should move higher.

[LC]

Why wouldn't the Fed allow them to return more capital?

 

This isn't like Fannie/Freddie where the gov't has a direct, financial incentive to keep milking those entities.

 

 

[Viking]

LC, it appears to me that the Fed wants the big US banks to break up. One way of making this happen is to force them to hold ever increasing amounts of capital on their balance sheets. Too much capital on the balance sheet depresses ROE (denominator problem). Low ROE = low multiple = low stock price.

 

The CCAR results on Wed will be very revealing in this regard. If payout ratios remain constrained, given the positive results seen with DFAST, then a rational conclusion is the Fed wants to motivate the big banks to continue to shrink in size. As the banks get smaller the amount of capital (as a percent) they are required to hold shrinks.

[redskin]

redskin, last year BAC paid out much less than what they earned. over the past 4 quarters they have returned something in the range of $6 billion (not close to $15). If the Fed approves them to pay out 100% of earnings they will offer a 'yield' of about 10% which would be crazy. And for BAC (and especially Citi) the stock they buy back would be below TBV which would be very good for shareholders. My guess is as much larger payouts get approved Mr Market will finally take notice and shares should move higher.

 

Viking,

 

The last CCAR used results as of Q3 2014.  Net income for the 4 quarters through Q3 2014 was approximately $5.2 billion.  BAC was authorized to buy back $800mm per quarter ($3.2B annually) and a .05 dividend/qtr ($2.1B annually) for a total of $5.3 billion.  My understanding is that the Fed will allow you to distribute capital as long as you meet the minimum requirements in the severely adverse scenario with a maximum of the previous 12 months earnings.

[LC]

LC, it appears to me that the Fed wants the big US banks to break up. One way of making this happen is to force them to hold ever increasing amounts of capital on their balance sheets. Too much capital on the balance sheet depresses ROE (denominator problem). Low ROE = low multiple = low stock price.

 

The CCAR results on Wed will be very revealing in this regard. If payout ratios remain constrained, given the positive results seen with DFAST, then a rational conclusion is the Fed wants to motivate the big banks to continue to shrink in size. As the banks get smaller the amount of capital (as a percent) they are required to hold shrinks.

 

Wouldn't allowing them to return capital facilitate this? Otherwise, the capital just accumulates and the banks find reasons to lend it out, expanding their balance sheet even more.

[meiroy]

 

LC,

 

in case you missed it:

http://www.wsj.com/articles/feds-tarullo-warns-banks-of-significant-increase-in-capital-in-future-stress-tests-1464870270

 

[LC]

 

LC,

 

in case you missed it:

http://www.wsj.com/articles/feds-tarullo-warns-banks-of-significant-increase-in-capital-in-future-stress-tests-1464870270

 

Ah, dammit.

 

Somebody go audit the Fed already. 

[Viking]

Redskin, thanks for the clarification. It makes sense that the Fed would use prior 4 quarter earnings as a maximum for what they will approve for CCAR. If the big banks get approved to return amounts that are anything close to prior 12 month earnings investors will be very happy. We will know amounts in a couple more days.

[meiroy]

 

 

RBS and Barclays halted for awhile.

[TheAiGuy]

 

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.

 

be patient

[blainehodder]

Im not patient. Just bought 12.3. The earnings power of BAC is just too difficult to ignore here.

[TwoCitiesCapital]

IMO the relative value will continue to pull them down as long as other global banks are dropping.

 

Hard to envision U.S. banks trading at 1x tangible book and 15x earnings if other global banks trade at 0.5x tangible book and at 7x earnings (values are as an example only, not actual values).

 

European banks are hitting 15-25 year lows, single digit PEs on already depressed earnings, and high single digit yields. EM banks trade at single digit multiples on depressed earnings with high single to low double digit yields.

 

As long as that is the case, it's hard to imagine U.S. banks going up. I don't know what the appropriate premium relative to their peers is, but it's already quite high.

[KCLarkin]

IMO the relative value will continue to pull them down as long as other global banks are dropping.

 

Hard to envision U.S. banks trading at 1x tangible book and 15x earnings if other global banks trade at 0.5x tangible book and at 7x earnings (values are as an example only, not actual values).

 

This isn't really central to the thesis.

 

If BAC can maintain earnings (or increase via cost cuts) and is allowed to increase buybacks and dividends to a 100% payout ratio, you will get better than 10% return (since buybacks are done at substantial discount to tangible book).

 

Actually, you want it to trade at 0.5 tangible book and use 100% of earnings for buybacks.

[TheAiGuy]

IMO the relative value will continue to pull them down as long as other global banks are dropping.

 

Hard to envision U.S. banks trading at 1x tangible book and 15x earnings if other global banks trade at 0.5x tangible book and at 7x earnings (values are as an example only, not actual values).

 

European banks are hitting 15-25 year lows, single digit PEs on already depressed earnings, and high single digit yields. EM banks trade at single digit multiples on depressed earnings with high single to low double digit yields.

 

As long as that is the case, it's hard to imagine U.S. banks going up. I don't know what the appropriate premium relative to their peers is, but it's already quite high.

 

Wait -- I can't tell if you are saying US banks are a bad investment or if we should wait a little to buy.

[TwoCitiesCapital]

IMO the relative value will continue to pull them down as long as other global banks are dropping.

 

Hard to envision U.S. banks trading at 1x tangible book and 15x earnings if other global banks trade at 0.5x tangible book and at 7x earnings (values are as an example only, not actual values).

 

European banks are hitting 15-25 year lows, single digit PEs on already depressed earnings, and high single digit yields. EM banks trade at single digit multiples on depressed earnings with high single to low double digit yields.

 

As long as that is the case, it's hard to imagine U.S. banks going up. I don't know what the appropriate premium relative to their peers is, but it's already quite high.

 

Wait -- I can't tell if you are saying US banks are a bad investment or if we should wait a little to buy.

 

Not really saying either - simply saying that U.S. banks are trading more on the fundamentals of their competitors than on the value they provide themselves. The stock price can continue to tank even as earnings stay stable/grow if their peers in Europe continue falling simply because of the relative value.

 

I have nothing against Bank of America - I just see more potential and a better price in banks like Santander that have diversified global exposure, a lot of penetration in underbanked communities, not as exposed to the threat of low/negative rates, and trades at a single-digit P/E with a 5-6% yield. That being said, the relative performance of SAN over the last 3 years has been terrible relative to BofA so I could continue to be wrong here.

 

I simply think the reason U.S. banks may continue to fall has everything to do with European banks and nothing to do with the fundamentals of U.S. banks. 

 

 

[Uccmal]

I just  picked up a tiny leap position in BAC, today.  2018s x $13.00 . 

 

Negative interest rates seem to be a real possibility.  I would never have guessed. 

 

Question: BAC has well over a trillion in deposits.  Could negative interest rates cause a movement to cash, and result in a reduction in deposits?  I dont know how people behave - I dont save money in the bank - Its all in stocks, all the time. 

 

I am not even sure it is possible - trillions in actual paper bills may be hard to come by. 

[Jurgis]

So far there has been no negative interest to retail deposit holders even in most Euro banks. It's pretty much business accounts getting hit by negatives and/or banks eating the loss and/or banks eating the loss but recovering it using fees.

 

Don't expect negative rates for deposit holders.

[TheAiGuy]

So, I bought around here in February, but not buying BAC until $10.83 (I'm actually restricted from trading for work reasons until August but pretty excited by the prospect that by time I'm able to trade, this'll be in single digits)

[Cardboard]

With Elizabeth Warren in the political picture, U.S. banks are un-investable IMO.

[TheAiGuy]

With Elizabeth Warren in the political picture, U.S. banks are un-investable IMO.

 

good luck with that

[xtreeq]

With Elizabeth Warren in the political picture, U.S. banks are un-investable IMO.

 

I guess you'll know the answer to that if/when Munger unwinds his DJCO portfolio

[CorpRaider]

I'm seeing $5B buyback and + 50% on the dividend to $.075.  So, like $8 billion, right?

 

Citi 8.6 Bill buyback $.16 p/s p/q (from $.05 currently?), $10.4 bil total.