BAC-WT - Bank of America Warrants

[bobp]

You don't mean that you exercised your bac A warrants do you? That's a big mistake if that's the case. They're trading with almost a dollar premium attached.

 

I converted my A warrants to shares.  Holding on to every shares I got.  I love them.  They are on their journey to be lowest cost, lowest risk global universal bank.  Just look at energy related charge offs the past year vs WFC or JPM.  Their culture is now so risk averse. 

 

Btw if Trump goes through with his corporate tax reduction policy, if BAC can get its tax rate down from 30% to 20%, shareholder equity value goes up by 15% (shareholders share of the profit goes up from 70% to 80%). 

 

The increase in long end rate by 50 bps since end of Q3 2016 alone is worth $1 B in annual pretax income.  If the fed goes through with 25 bps fed funds hike, that's another $0.75 B in annual pretax income.

 

Check out Hensarling Financial CHOICE act.  IF it passes, there will be an option for GSIB to avoid dodd-frank by having 10% SLR.  BAC is already at 7.1% and this will continue to build up.  BAC spends billions per year on dodd-frank, the option to avoid it could be appealing.  Imagine not having to do annual stress test, living will etc.  However, this will also lower barrier to entry.

[Parsad]

No, the instinct is to sell after the last 10% move in 2 days of a 60% from the February lows, after earnings have come back after not being there for years, and after a, what, tripling of the stock from 2011/2012? Easy money has been made, $18+ is more or less a fair price for the stock unless you think something about the company has changed. Sentiment can change quickly and is hard to predict -- it's not my game.

 

reduced my position by 25% over yesterday and today.

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.  This is not the same company from 3 years ago, let alone 7 years ago.

 

I must be one of the few people who hasn't sold any shares I bought from 2008.  In fact I loaded up a few months ago on BAC leaps when it was trading below $13.  Cheers!

[KCLarkin]

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.

 

Tangible Book is $17.13 according to Q3 release?

[kevin4u2]

No, the instinct is to sell after the last 10% move in 2 days of a 60% from the February lows, after earnings have come back after not being there for years, and after a, what, tripling of the stock from 2011/2012? Easy money has been made, $18+ is more or less a fair price for the stock unless you think something about the company has changed. Sentiment can change quickly and is hard to predict -- it's not my game.

 

reduced my position by 25% over yesterday and today.

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.  This is not the same company from 3 years ago, let alone 7 years ago.

 

I must be one of the few people who hasn't sold any shares I bought from 2008.  In fact I loaded up a few months ago on BAC leaps when it was trading below $13.  Cheers!

 

The answer to your question is crickets.  CoBF is a much better study in behavior finance than value investing.

[LC]

 

The answer to your question is crickets.  CoBF is a much better study in behavior finance than value investing.

 

Pretty sure you got bitten by the "While you were typing another post was published" bug :D

[kevin4u2]

 

The answer to your question is crickets.  CoBF is a much better study in behavior finance than value investing.

 

Pretty sure you got bitten by the "While you were typing another post was published" bug :D

 

Nope.  I am still waiting for an answer to Parsad's question.  Is TBV = Intrinsic value?  You have got to be kidding me. 

[vinod1]

No, the instinct is to sell after the last 10% move in 2 days of a 60% from the February lows, after earnings have come back after not being there for years, and after a, what, tripling of the stock from 2011/2012? Easy money has been made, $18+ is more or less a fair price for the stock unless you think something about the company has changed. Sentiment can change quickly and is hard to predict -- it's not my game.

 

reduced my position by 25% over yesterday and today.

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.  This is not the same company from 3 years ago, let alone 7 years ago.

 

I must be one of the few people who hasn't sold any shares I bought from 2008.  In fact I loaded up a few months ago on BAC leaps when it was trading below $13.  Cheers!

 

Its core earnings power is around $1.5 per share now. Granted it is likely to grow to $2 per share in a couple of years.

 

I sold at $18.75, which is 12.5 times current earnings power. My estimate of IV is in the $20 to $22 range. So I am basically reducing it as it reached closer to my estimate of IV.

 

I must have done 3 or 4 round trips over the last 5 years purely based on valuation. I converted my wife's 403b to rollover IRA just to buy BAC earlier in the year and put about half of it into BAC at a weighted average of about $12.1 per share. I sold 3/4 of it at $18.75 today since it is not as attractive.

 

Could you please explain why you have not reduced the position even as the Price/IV ratio changed significantly? I can see the tax benefit of not selling, but why keep the allocation at the same level when valuation changed so much?

 

Thanks

 

Vinod

[LC]

 

The answer to your question is crickets.  CoBF is a much better study in behavior finance than value investing.

 

Pretty sure you got bitten by the "While you were typing another post was published" bug :D

 

Nope.  I am still waiting for an answer to Parsad's question.  Is TBV = Intrinsic value?  You have got to be kidding me.

 

BAC is trading above TBV along with other large banks

 

If the question is whether BAC is trading close to IV, that is a question applicable to the other large banks as well, not just BAC.

 

People have been throwing around the $20-22 range as IV for years now based on $2/sh earnings power. Well, we're not at $2/sh yet and we're very close to $20/share.

[meiroy]

 

So, I sold all the calls when it got to 15. Together with most other bank options. Oh the pain.

 

Think I'll have some chocolate ice cream now.  With some whiskey. Maybe more than some.

 

I was tempted to as well.  I was holding Jan17 calls and getting nervous.  I'm glad I waited.  It looks like I sold at least a day too early, but to modify a popular quote it is better to sell at approximately the right time then the absolutely wrong time.

 

Jan 17 calls is highly speculative short duration options play.  Which is fine, as long as we call it what it is. It's only a LEAP if there's still a year left, in my book.  So, I also got some of these but not in a meaningful amount.

 

As far as Druckenmiller and BAC, well the banks grow when the economy grows so if one thinks the economy will grow faster...

 

Of course, he is a master trader and could change his strategy tomorrow.

[Parsad]

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.

 

Tangible Book is $17.13 according to Q3 release?

 

Sorry, that should say book value...not tangible book.  I was typing on my iPhone in a doctor's office while waiting for my flu shot.  Cheers!

[plato1976]

$24 we are coming

......

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.

 

Tangible Book is $17.13 according to Q3 release?

 

Sorry, that should say book value...not tangible book.  I was typing on my iPhone in a doctor's office while waiting for my flu shot.  Cheers!

[Ballinvarosig Investors]

No, the instinct is to sell after the last 10% move in 2 days of a 60% from the February lows, after earnings have come back after not being there for years, and after a, what, tripling of the stock from 2011/2012? Easy money has been made, $18+ is more or less a fair price for the stock unless you think something about the company has changed. Sentiment can change quickly and is hard to predict -- it's not my game.

 

reduced my position by 25% over yesterday and today.

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.  This is not the same company from 3 years ago, let alone 7 years ago.

 

I must be one of the few people who hasn't sold any shares I bought from 2008.  In fact I loaded up a few months ago on BAC leaps when it was trading below $13.  Cheers!

I have found myself disagreeing with you a lot in the last few months, but on the banks, we're both of the same mind.

 

People seem to be still applying a worst-case valuation to the big banks (they are worth book value, or about 10x normalized earnings). This was a fair valuation 5 years ago when there was a lot of doubt about whether these companies would survive without dilution, permanent impairment, etc. The story has changed though! BAC are well capitalised, they own a much tighter collection of businesses, they have lowered the leverage, the profits are coming back, the impairment charges slowly going away. The kicker in all this though is that off the current undervalued level, they are also showing 10% annual growth over the last 5 years, and I suspect there is still decent growth to come. Not only that, but you have management doing share buybacks at this undervalued level, which in the future will juice the earnings.

 

BAC is basically an undervalued compounder - the best thing to do is to just sit on it. Stop listening to the talking heads, stop trading, trimming, hedging, etc. Come back to it in 5 years time. I would be surprised if it didn't outperform the general S&P.

[Ballinvarosig Investors]

Oh, and if you think I am some @sshole who is just out of my mind, maybe you'd pay more attention to Charlie Munger?

 

http://www.dataroma.com/m/hist/p_hist.php?f=DJCO

 

He's held the same amount of shares for three years now. In that time the share price has went nowhere, in fact when you factor in buybacks and the higher book value, BAC/WFC are MATERIALLY cheaper than when Charlie bought.

 

Said all the same in the WFC thread. Just buy the damn things, sit on it and hold, because we have a heck of a long runway ahead of us.

[rkbabang]

 

So, I sold all the calls when it got to 15. Together with most other bank options. Oh the pain.

 

Think I'll have some chocolate ice cream now.  With some whiskey. Maybe more than some.

 

I was tempted to as well.  I was holding Jan17 calls and getting nervous.  I'm glad I waited.  It looks like I sold at least a day too early, but to modify a popular quote it is better to sell at approximately the right time then the absolutely wrong time.

 

Jan 17 calls is highly speculative short duration options play.  Which is fine, as long as we call it what it is. It's only a LEAP if there's still a year left, in my book.  So, I also got some of these but not in a meaningful amount.

 

As far as Druckenmiller and BAC, well the banks grow when the economy grows so if one thinks the economy will grow faster...

 

Of course, he is a master trader and could change his strategy tomorrow.

 

I agree.  I was on the cusp of converting them to Jan18 calls when everything went south.  Not knowing what to do I held, and held, and held, and sold a few days ago.  I can tell you, I did not like the feeling.

 

[CorpRaider]

Oh, and if you think I am some @sshole who is just out of my mind, maybe you'd pay more attention to Charlie Munger?

 

http://www.dataroma.com/m/hist/p_hist.php?f=DJCO

 

He's held the same amount of shares for three years now. In that time the share price has went nowhere, in fact when you factor in buybacks and the higher book value, BAC/WFC are MATERIALLY cheaper than when Charlie bought.

 

Said all the same in the WFC thread. Just buy the damn things, sit on it and hold, because we have a heck of a long runway ahead of us.

 

Buy it right and sit tight.

[Jurgis]

Oh, and if you think I am some @sshole who is just out of my mind, maybe you'd pay more attention to Charlie Munger?

 

http://www.dataroma.com/m/hist/p_hist.php?f=DJCO

 

He's held the same amount of shares for three years now. In that time the share price has went nowhere, in fact when you factor in buybacks and the higher book value, BAC/WFC are MATERIALLY cheaper than when Charlie bought.

 

Said all the same in the WFC thread. Just buy the damn things, sit on it and hold, because we have a heck of a long runway ahead of us.

 

Datorama's data on Munger buys are wrong. I was misled by this too. He bought BAC @ around $5 not $15 as Datorama writes.

[merkhet]

Yes, IIRC, I think he bought at the end of 2011.

[TheAiGuy]

 

How is $18 fair value?  By what measure?  BAC should be trading at no less than tangible book if other large US banks are trading greater than tangible book.

 

Tangible Book is $17.13 according to Q3 release?

 

Sorry, that should say book value...not tangible book.  I was typing on my iPhone in a doctor's office while waiting for my flu shot.  Cheers!

 

Why do you think the company's goodwill relevant to the valuation? One way of thinking about a bank's valuation is looking at the money it can earn on it's capital and incorporating a leverage ratio to get a sense of earnings. There are more sophisticated ways of doing it but this is the logic of ROTE and P/TB.

 

The problem with including goodwill in the valuation is that it isn't capital the bank has access to, so if you value a bank on the assets you don't want to include goodwill b/c it isn't an asset the bank has access to.  Moreover, valuing the goodwill at par implies you agree with the premium the bank over tangible assets the bank has paid in the past when acquiring other firms. I would argue that BofA has overpaid for those assets in the past, and while I would argue that even in the current environment BofA is worth a premium over its tangible equity capital, this premium is not reflected in the goodwill, which I believe to be more or less an arbitrary measure.

 

I should mention that while I have sold down  ~38% of my holdings in this company, it is still a significant position for me.

[Rasputin]

I converted my A warrants to shares.  Holding on to every shares I got.  I love them.  They are on their journey to be lowest cost, lowest risk global universal bank.  Just look at energy related charge offs the past year vs WFC or JPM.  Their culture is now so risk averse. 

 

Btw if Trump goes through with his corporate tax reduction policy, if BAC can get its tax rate down from 30% to 20%, shareholder equity value goes up by 15% (shareholders share of the profit goes up from 70% to 80%). 

 

The increase in long end rate by 50 bps since end of Q3 2016 alone is worth $1 B in annual pretax income.  If the fed goes through with 25 bps fed funds hike, that's another $0.75 B in annual pretax income.

 

Check out Hensarling Financial CHOICE act.  IF it passes, there will be an option for GSIB to avoid dodd-frank by having 10% SLR.  BAC is already at 7.1% and this will continue to build up.  BAC spends billions per year on dodd-frank, the option to avoid it could be appealing.  Imagine not having to do annual stress test, living will etc.  However, this will also lower barrier to entry.

You sold warrant and bought shares at this price?

 

Yes i sold warrant and bought shares yesterday, i got about 0.34 shares per warrant.  I think multiple is still low especially at the low interest rate cycle.  BAC is generating earnings the right way, and unlike JPM or WFC, there are more things to optimize at BAC that gives BAC higher odds of increasing earnings going forward even with similar interest rate and economic environment as 2016.  I also believe BAC's earnings are of higher quality since they refuse to go down the credit ladder and they are still not buying mortgages from brokers.  BAC is the new WFC. 

[Rasputin]

BTW, this sentence from sequioa fund July 2016 is wrong, in that BAC, not WFC had the lowest cost of deposit among its peer group in both q1 and q2 of 2016

 

"Last quarter, Wells' $1.2 trillion in deposits cost only 0.10% on an annualized basis, the lowest  interest cost among its peer group, if not the entire banking industry."

 

Yes, Wells deposits cost 0.10% in q1 and q2, but BAC deposits cost 0.08%.  And this trend continues to Q3 2016 where WFC deposit cost was 0.11% and BAC's was 0.09%.

[onyx1]

Gundlach: Trump victory sets stage for massive bond bear market

 

"Look for Trump to "amp up the deficit" to pay for infrastructure and other programs - producing an inflation rate of 3% and nominal GDP growth of 4-6%. Given that, there's no way the 10-year Treasury yield stays near its current level of 2.15%, and it could rise as high as 6% in the next four or five years."

 

 

What might this mean for BAC earnings and valuation?  Here is a back of the envelop estimate:

Q3 2016 run rate earning are $1.65/share

 

After 3 years of 5% GDP growth, $1.65/share grows to $1.82/share

 

At the end of Q3 2016, BAC declared a positive 100bp parallel yield curve shift would add $5.3 bln in PT earnings

 

Assuming BAC reduces curve exposure as rate rise, I'll assume the following:

 

1st 100bp = $5.3 bln

2nd 100bp = $4.0 bln

3rd 100bp = $3.0 bln

 

With a 300bp parallel move from here, the 10-year Treasury would be around 5.15% (it closed at 1.60% on 9/30), BAC would add $12.3 bln to PT earnings.

 

After tax (assuming 35% rate) $12.3*.65 = $8bln, or an additional EPS of $8/11= $0.73/share

 

$1.82 + $0.73 = $2.55/ share

 

I assume the planned & announced reduction in expenses will offset a likely increase in provisions necessary from higher growth.

 

With core earnings growing at 5% and reported earning growing at 15%, a reasonable multiple is 14x.

 

$2.55 x 14 = $35.70 /share in three years

 

And that doesn't even include the $1-$2 /share they have in existing DTA assets that will be converted into cash over this period.

[meiroy]

onyx1,

 

Thanks for the valuation number.  As this is actually based on a macro call, one thing that bothers me is the impact on the bond market and then the equity market and our friends the banks who will surely be the in the center of it all. So, at a minimum we are looking at high volatility, technical sell-offs and who knows what else.  I guess if you're Druck you go long/short but just going long BAC at this point... dunno. Still hanging on my cash.

[onyx1]

onyx1,

 

Thanks for the valuation number.  As this is actually based on a macro call, one thing that bothers me is the impact on the bond market and then the equity market and our friends the banks who will surely be the in the center of it all. So, at a minimum we are looking at high volatility, technical sell-offs and who knows what else.  I guess if you're Druck you go long/short but just going long BAC at this point... dunno. Still hanging on my cash.

 

 

I wouldn't buy on this either.  But for people like me who already own it, the possibility of this scenario may lead us to demand more before we sell.

[Rasputin]

For me, BAC recurring op eps for Q3 2016 was $0.37 vs $0.41 reported.  Then I would adjust for $250 million per quarter retirement eligible incentive expense that is always charged to Q1 (almost $1 B in Q1).  So I'd say $0.36 is a good running rate from Q3.

 

Main adjustments to the $0.41 reported eps are :

 

1.  MSR Fair value gain (roughly $360 million pretax) that's unlikely to repeat every quarter

2.  Gain from loan sale of roughly $175 million pretax also not going to be quarterly

 

Then we have to decide whether FICC revenue can remain at the high level reached in Q3.  Q4 is always a relatively quiet quarter for capital market. 

 

I'd use starting point of maybe $1.40 eps and go from there. 

 

Adding fuel to the fire is the reduction in corporate tax rate.  BAC tax rate is roughly 30%, WFC is 31%, JPM is 27-28%. 

[vinod1]

Gundlach: Trump victory sets stage for massive bond bear market

 

"Look for Trump to "amp up the deficit" to pay for infrastructure and other programs - producing an inflation rate of 3% and nominal GDP growth of 4-6%. Given that, there's no way the 10-year Treasury yield stays near its current level of 2.15%, and it could rise as high as 6% in the next four or five years."

 

 

What might this mean for BAC earnings and valuation?  Here is a back of the envelop estimate:

Q3 2016 run rate earning are $1.65/share

 

After 3 years of 5% GDP growth, $1.65/share grows to $1.82/share

 

At the end of Q3 2016, BAC declared a positive 100bp parallel yield curve shift would add $5.3 bln in PT earnings

 

Assuming BAC reduces curve exposure as rate rise, I'll assume the following:

 

1st 100bp = $5.3 bln

2nd 100bp = $4.0 bln

3rd 100bp = $3.0 bln

 

With a 300bp parallel move from here, the 10-year Treasury would be around 5.15% (it closed at 1.60% on 9/30), BAC would add $12.3 bln to PT earnings.

 

After tax (assuming 35% rate) $12.3*.65 = $8bln, or an additional EPS of $8/11= $0.73/share

 

$1.82 + $0.73 = $2.55/ share

 

I assume the planned & announced reduction in expenses will offset a likely increase in provisions necessary from higher growth.

 

With core earnings growing at 5% and reported earning growing at 15%, a reasonable multiple is 14x.

 

$2.55 x 14 = $35.70 /share in three years

 

And that doesn't even include the $1-$2 /share they have in existing DTA assets that will be converted into cash over this period.

 

I would love to have your scenario play out as a BAC investor. I might even put a Trump bumper sticker in that case. :) But I think you are ignoring 2nd order effects.

 

1. The spectacularly low interest rates have a corresponding parallel in spectacularly low loan loss rates. Provision for loan losses are running at about 0.4% level or about $3 billion. Normalized they are more likely to be in the $7 to $8 billion range. When interest rates increase we are also likely to have higher loan loss rates for various reasons. This is likely to knock off $4 to $5 billion from your estimates.

 

2. Interest rates going up by say 3% would reduce mortgage production income as there would be fewer people who would be taking out mortgages and mortgage refinancing would be close to shutdown. It would also depress housing prices significantly with its own negative consequences.

 

3. They would also incur losses on their securities portfolio during this period of rising rates. This is not going to hurt long term earnings power, but it would impact net income and book value during the transition period.

 

Overall, increases in interest rates (more accurately a steep yield curve) would be beneficial to the banks. just not as much as you extrapolate from company exposure to a 100 bps shift in interest rates.

 

Vinod