BAC-WT - Bank of America Warrants

[racemize]

Benchmark, strictly from a capital return perspective C has two benefits versus the other big US banks:

1.) deferred tax asset: C utilizes $2-3 billion per year. This year C is forecast to earn about $14 billion. C management estimates they will utilize about $2 billion of DTA. Together C will increase its regulatory capital by about $16 billion.

2.) C has more excess capital on its balance sheet than the other big US banks (about $15 billion) and it looks like regulators agree and are now letting them reduce this number (my guess is about $3 billion).

 

Viking, do you have the numbers on DTAs versus the two companies off hand?  BAC also is using them, so I'm wondering how much difference there is in point 1.

[onyx1]

BAC will be redeem about $10 B plus of preferred from Q317 to Q218.

 

 

Can you please link or point me to a reference for the $10+bln preferred redemption?

[Valuehalla]

https://www.bloomberg.com/news/articles/2017-06-28/bofa-s-dividend-to-rise-above-buffett-s-target-for-a-stock-swap

[onyx1]

https://www.bloomberg.com/news/articles/2017-06-28/bofa-s-dividend-to-rise-above-buffett-s-target-for-a-stock-swap

 

I'm confused.  Series T is a $5bln liquidation preference.  Where is the rest?

[Rasputin]

The redemption will be done between Q317 to Q218.  They haven't announced it yet.  The difference between DFAST and CCAR minimum stressed ratios is roughly $30 billion.  Almost $20 B for divs and share buyback, the rest will be used to redeem prefs.  Bac had about 25 B prefs outstanding.  I think Brka prefs conversion will be capital neutral.

[onyx1]

The redemption will be done between Q317 to Q218.  They haven't announced it yet.  The difference between DFAST and CCAR minimum stressed ratios is roughly $30 billion.  Almost $20 B for divs and share buyback, the rest will be used to redeem prefs.  Bac had about 25 B prefs outstanding.  I think Brka prefs conversion will be capital neutral.

 

 

Interesting.  If they haven't announced it yet, how do we know?

[Rasputin]

onyx1,

 

you need to go to the actual fed release for both DFAST and CCAR here https://www.federalreserve.gov/newsevents/pressreleases/2017-press.htm 

 

The difference between the minimum stressed ratio between the 2 is the bank's capital planning.  I'll do the math for BAC, but you can do this for all stressed banks. 

 

DFAST minimum ratios for BAC:

CET1 8.9%

Tier1 10.5%

Total Capital 13.2%

T1 leverage 6.8%

SLR 5.4%

 

CCAR minimum ratios for BAC:

CET1 6.8%

Tier1 8.4%

Total capital 11.0%

T1 leverage 5.4%

SLR 4.3%

 

DFAST min CET1 minus CCAR min CET1 = 2.1%.  Multiply that by BAC RWA = $30 B. 

You can do for the other 2 RWA based ratios, and you'll get to $30 B

DFAST T1 leverage minus CCAR T1 leverage = 1.4%.  Multiply that by BAC AQAA (adjusted quarterly average asset) of $2.13 T = $30 B. 

DFAST SLR minus CCAR SLR = 1.1%.  Multiply that by BAC SLR exposure of $2.7 T = $30 B. 

 

I believe only BAC out of the trillionaires will redeem prefs by more than $10 B.

[onyx1]

onyx1,

 

you need to go to the actual fed release for both DFAST and CCAR here https://www.federalreserve.gov/newsevents/pressreleases/2017-press.htm 

 

The difference between the minimum stressed ratio between the 2 is the bank's capital planning.  I'll do the math for BAC, but you can do this for all stressed banks. 

 

DFAST minimum ratios for BAC:

CET1 8.9%

Tier1 10.5%

Total Capital 13.2%

T1 leverage 6.8%

SLR 5.4%

 

CCAR minimum ratios for BAC:

CET1 6.8%

Tier1 8.4%

Total capital 11.0%

T1 leverage 5.4%

SLR 4.3%

 

DFAST min CET1 minus CCAR min CET1 = 2.1%.  Multiply that by BAC RWA = $30 B. 

You can do for the other 2 RWA based ratios, and you'll get to $30 B

DFAST T1 leverage minus CCAR T1 leverage = 1.4%.  Multiply that by BAC AQAA (adjusted quarterly average asset) of $2.13 T = $30 B. 

DFAST SLR minus CCAR SLR = 1.1%.  Multiply that by BAC SLR exposure of $2.7 T = $30 B. 

 

I believe only BAC out of the trillionaires will redeem prefs by more than $10 B.

 

Thanks for this explanation Rasputin, I hope you are right.

 

If BAC's capital plan was $30bln, I don't understand why they only disclose $18.5bln (common+dividends) of it, and leave out preferred redemptions.

 

Also, it appears that the CCAR stress minimums are higher that the required minimums by at least another $30bln.

[Liberty]

Warren Buffett's Berkshire Hathaway will exercise warrants in Bank of America allowing it to acquire 700 million common shares at an exercise price of $7.14 each, or about $5 billion.

 

http://www.cnbc.com/2017/06/30/warren-buffett-just-made-a-quick-12-billion-on-bank-of-america.html

[Viking]

I just came across an old write up (June 2016) on BAC on VIC from poster bpuri. Not sure if it has been linked to before. For those looking to learn more it is a great overview of BAC (even though it was written a year ago when BAC was trading at $13). Since the article was written the 5 points below were all identify by the author as headwinds at the time. The outlook for BAC has improved significantly, with only the mortgage business remaining a headwind.

1.) elevated legacy and core expenses

2.) net interest income

3.) regulatory changes

4.) Global Markets: trading

5.) mortgage business

 

Regarding NIM, it looks like the 10 year US treasury is moving higher again which is good for BAC.

 

VIC: https://www.valueinvestorsclub.com/idea/BANK_OF_AMERICA_CORP/138662

 

Shares closed today at $24.62 = PE 15 ($1.61/share earnings). Looks reasonable for a company forecasted to grow EPS by 20% per year and paying a 2% dividend.

2016 = $1.50

2017E = $1.75

2018E = $2.15

 

[Rasputin]

I was wrong.

 

That $30 B difference between CCAR and DFAST is capital action for 9 quarter stressed period vs $17.3 B announced for 4 quarters.  So if I assume they will only keep the dividend during the rest of the 5 quarter stressed period, plus the $2.9 B preferred lost due to Berkshire's preferred conversion, I get close to $30 B. 

 

After Berkshire convert their pref, pref shares outstanding will be roughly $22.3 B which is just about 1.5% of their RWA (required by TLAC), so they can't redeem any more but they don't have to issue any more either. 

[onyx1]

No worries Rasputin, regulatory interpretation can be mind numbing.

 

For me, the positive part of Q2 was the $0.46/share reported earnings at an elevated tax rate of 37% (due to one-time sale of UK credit card business).  At a normalized rate of 30% (confirmed on the CC), Q2 would have been $0.53 for a current run rate of $2.12 annually. 

 

I haven't seen a single comment on this important detail.

[LC]

Why apply a normalized tax rate to a one-time asset sale?

[onyx1]

Why apply a normalized tax rate to a one-time asset sale?

 

Good question and after taking a re-look, the UK CC sale generated $800mm gain and a tax bill for $700mm (due to currency hedging gains) which caused the elevated rate.  Remove both and earnings are unchanged at $0.46.  So applying a normalized tax rate to a one-time asset sale is wrong.  Thanks for pointing this out.

 

[Rasputin]

As of market close Aug 4, 2017, BAC's market cap is greater than WFC's.

 

BAC $24.97 times 10.8 B avg diluted sh o/s = $270 B

WFC $52.92 times 5.04 B avg diluted sh o/s = $267 B

 

When i first bought BAC on Aug 8 2011, BAC's market cap was $6.89 times 10.3 B avg diluted sh o/s = $71 B while WFC's was $24 times 5.3 B avg diluted sh o/s = $127 B.

 

I think today's relationship between the 2 trillionaire banks is more appropriate.

 

Cost of deposits at BAC in Q2 2017 was 11 bps, JPM's was 18 bps, while WFC's was 21 bps.  It would cost BAC around $1.2 B more per year if BAC's cost of deposits is equal to WFC's. 

 

Credit card charge-off rate in Q2 2017 was 2.87% for BAC, 3.01% for JPM, 3.67% for WFC.

[benchmark]

As of market close Aug 4, 2017, BAC's market cap is greater than WFC's.

 

BAC $24.97 times 10.8 B avg diluted sh o/s = $270 B

WFC $52.92 times 5.04 B avg diluted sh o/s = $267 B

 

When i first bought BAC on Aug 8 2011, BAC's market cap was $6.89 times 10.3 B avg diluted sh o/s = $71 B while WFC's was $24 times 5.3 B avg diluted sh o/s = $127 B.

 

I think today's relationship between the 2 trillionaire banks is more appropriate.

 

Cost of deposits at BAC in Q2 2017 was 11 bps, JPM's was 18 bps, while WFC's was 21 bps.  It would cost BAC around $1.2 B more per year if BAC's cost of deposits is equal to WFC's. 

 

Credit card charge-off rate in Q2 2017 was 2.87% for BAC, 3.01% for JPM, 3.67% for WFC.

 

WFC's account scandal caused them at least 10% of their market cap.

 

Are you still holding BAC? I trimmed a bit on the warrant at the beginning of the year, am debating if I should do more.

[Rasputin]

BAC is roughly 70% of my portfolio.  After what happened in 2016, I have decided the warrants do not fit my temperament. 

[doughishere]

https://charlierose.com/videos/30989

 

Thursday 09/21/2017

Brian Moynihan, C.E.O of Bank of America, on how technology is changing the business world.

[Sullivcd]

Just carved out a fresh multi-year high.  Congrats to all who have been able to hang on for all these years.  Thanks to ERICOPOLY, Parsad, UCCMAL and others for your clear thinking and rational analysis while the storms were raging.

[longlake95]

Ya, it's been a tough slog with these warrants. To see them do precisely nothing, for 4+ years then almost triple in the year, has been a good test of patience. I've finally exercised my warrants earlier this week. Interesting how the broker told me it would take 2 weeks to complete the transaction. Also an intersting but basically useless tidbit - broker called me back to tell me the there is one little line in the prospectus the says B of A "can't guarantee" the exercise price. So I may not exercise at the denoted $12.807 - but something close.  :o

[SnarkyPuppy]

Ya, it's been a tough slog with these warrants. To see them do precisely nothing, for 4+ years then almost triple in the year, has been a good test of patience. I've finally exercised my warrants earlier this week. Interesting how the broker told me it would take 2 weeks to complete the transaction. Also an intersting but basically useless tidbit - broker called me back to tell me the there is one little line in the prospectus the says B of A "can't guarantee" the exercise price. So I may not exercise at the denoted $12.807 - but something close.  :o

 

What is the benefit of exercising the warrants as opposed to just selling the warrants at a profit? 

[longlake95]

Because, I'm happy to be a long-term holder of BAC so by exercising I'm upping my exposure to BAC by 30%. Also since they have tripled the divvy, it's now a 4% yielder on my cost base. Also, I now don't have to worry about the time decay of the warrants as they approach expiration in 14 months.

[Sunrider]

Because, I'm happy to be a long-term holder of BAC so by exercising I'm upping my exposure to BAC by 30%. Also since they have tripled the divvy, it's now a 4% yielder on my cost base. Also, I now don't have to worry about the time decay of the warrants as they approach expiration in 14 months.

 

It might have changed by now but the time value in the warrants that you'd be worried about was minimal the last time I checked?

 

[Viking]

The tailwinds for all the big US banks are very good:

1.) higher rates

2.) tax reform

3.) regulatory relief

4.) continued US and global economic growth

5.) for BAC and C continued unwinding of legacy assets

6.) 2018-2019 CCAR capital return for BAC should be much higher (possibly 100% of earnings)

 

Lots of opportunities for BAC to improve business and grow earnings. With all these tailwinds, BAC is trading today at 12 x 2018 estimated earnings (of $2.15/share). Still dirt cheap.

[insight]

Ya, it's been a tough slog with these warrants. To see them do precisely nothing, for 4+ years then almost triple in the year, has been a good test of patience. I've finally exercised my warrants earlier this week. Interesting how the broker told me it would take 2 weeks to complete the transaction. Also an intersting but basically useless tidbit - broker called me back to tell me the there is one little line in the prospectus the says B of A "can't guarantee" the exercise price. So I may not exercise at the denoted $12.807 - but something close.  :o

 

LongLake There is no reason that you should exercise your Warrants. You would be effectively paying $12.807 plus the current trading price of $13.70.

 

A total price of $26.50 as opposed to the current common share price of $25.86.

 

Sell your Warrants and Add whatever additional Capital you wish to invest.