BAC-WT - Bank of America Warrants

[longlake95]

No, I'm exercising at $12.807 + $5 (my cost on the warrants that I've already paid) = $17.807, on a $26 stock. So i've just effectively transferred the gain i had in the warrants to a gain in the common. But now i own 30% more BAC with a whooper divvy and $5B in buybacks and rising rates. Oh, it also won't trigger a tax event.

 

 

 

 

[insight]

I did not know your basis was $5. Obviously Tax implications are relevant. However, you should not relate to the  present cost of your Warrants as $5. You will be paying $.70 more per share for a right to defer your tax payment Which might well be the most sensible decision.

[Valuehalla]

THX Viking for pointing out the basics !!

All time you were totally right with your assessment of the bank situation.

[brker_guy]

No, I'm exercising at $12.807 + $5 (my cost on the warrants that I've already paid) = $17.807, on a $26 stock. So i've just effectively transferred the gain i had in the warrants to a gain in the common. But now i own 30% more BAC with a whooper divvy and $5B in buybacks and rising rates. Oh, it also won't trigger a tax event.

 

I don't know if you guys know, but these BAC-WTA warrants can only be exercised as cashless exercise.  Thus, you will get fewer shares. It's in the prospectus.

[Viking]

Valuehalla, it still surprises me:

1.) how short term focussed ‘Mr Market’ is

2.) the predominance of momentum or the lemming behaviour of ‘Mr Market’ (little independent thinking)

 

The big US banks were screaming buys two years ago.

- the massive legal payouts had finished.

- the painful and costly regulations were largely in place and the additional costs and financial hit of complying was built into the run rate of the banks

- multi year restructurings at BAC and C were largely over (getting rid of toxic assets)

- US economy was chugging along

- long term interest rates were in the process of bottoming (NIM was contracting)

- some of the big banks were trading below tangible book value

 

Trump getting elected has been an absolute gift for bank stock investors as many bank stocks are up 70% from their lows pre-election.

 

The crazy thing is looking out two years most are still cheap (not crazy cheap) as the story keeps getting better. I think we may see a pickup in economic activity in the US next year; if this happens and inflation ticks up we will see rate increases from the Fed and bank stocks will rally. As I have said many times, higher total earnings, much lower share count and higher PE multiple = much higher stock price.

 

I think investors sometimes over complicate the process... instead of going for the easy to understand opportunity they gravitate to the more complex. I like to keep things as simple as possible.

[benchmark]

No, I'm exercising at $12.807 + $5 (my cost on the warrants that I've already paid) = $17.807, on a $26 stock. So i've just effectively transferred the gain i had in the warrants to a gain in the common. But now i own 30% more BAC with a whooper divvy and $5B in buybacks and rising rates. Oh, it also won't trigger a tax event.

 

I don't know if you guys know, but these BAC-WTA warrants can only be exercised as cashless exercise.  Thus, you will get fewer shares. It's in the prospectus.

 

With cashless exercise, how is the tax base calculated? Let's say that warrant is $14, and the stock price is $26, you'll get 14/26 = 0.538 share per warrant. If you bought your warrant at $5, then you cost basis on that fractional share is $5. Is that the right?

[Gregmal]

Valuehalla, it still surprises me:

1.) how short term focussed ‘Mr Market’ is

2.) the predominance of momentum or the lemming behaviour of ‘Mr Market’ (little independent thinking)

 

The big US banks were screaming buys two years ago.

- the massive legal payouts had finished.

- the painful and costly regulations were largely in place and the additional costs and financial hit of complying was built into the run rate of the banks

- multi year restructurings at BAC and C were largely over (getting rid of toxic assets)

- US economy was chugging along

- long term interest rates were in the process of bottoming (NIM was contracting)

- some of the big banks were trading below tangible book value

 

Trump getting elected has been an absolute gift for bank stock investors as many bank stocks are up 70% from their lows pre-election.

 

The crazy thing is looking out two years most are still cheap (not crazy cheap) as the story keeps getting better. I think we may see a pickup in economic activity in the US next year; if this happens and inflation ticks up we will see rate increases from the Fed and bank stocks will rally. As I have said many times, higher total earnings, much lower share count and higher PE multiple = much higher stock price.

 

I think investors sometimes over complicate the process... instead of going for the easy to understand opportunity they gravitate to the more complex. I like to keep things as simple as possible.

 

Spot on. The banks were so obvious the past few years. Don't know how anyone missed it. Same goes for the autos. Same probably still true for some of the airlines. But the slam dunk obvious value investments list keeps dwindling.

[Viking]

BAC certainly has turned the corner the past two years. However, similar to C, they underinvested for many years as they dealt with legacy issues. They are still not completely done with selling off legacy assets they have in runoff and this will continue to be a small drag on revenue growth for a few more years. However, for the past couple of years they have moved to offence and they have been making investments in their various businesses. They also have a $53 billion cost target for 2018 (versus $55 billion in 2017). Decent top line growth combined with a reduction in expenses will lead to solid growth in total profits. The bank will earn $1.85 in 2017 and $2.25 in 2018. They also will likely be approved to return 100% of earnings is next CCAR cycle = +$20 billion (starting next July). The dividend will also be increasing 30% in 2018. The party is just getting started for this bank.

 

Crazy how much WFC is struggling right now. My guess is WFC has another 6-9 months of pain before it turns the corner.

 

Comparison of efficiency ratios of BAC and WFC: https://finance.yahoo.com/news/bank-america-more-efficient-wells-151100026.html

[racemize]

BAC certainly has turned the corner the past two years. However, similar to C, they underinvested for many years as they dealt with legacy issues. They are still not completely done with selling off legacy assets they have in runoff and this will continue to be a small drag on revenue growth for a few more years. However, for the past couple of years they have moved to offence and they have been making investments in their various businesses. They also have a $53 billion cost target for 2018 (versus $55 billion in 2017). Decent top line growth combined with a reduction in expenses will lead to solid growth in total profits. The bank will earn $1.85 in 2017 and $2.25 in 2018. They also will likely be approved to return 100% of earnings is next CCAR cycle = +$20 billion (starting next July). The dividend will also be increasing 30% in 2018. The party is just getting started for this bank.

 

Crazy how much WFC is struggling right now. My guess is WFC has another 6-9 months of pain before it turns the corner.

 

Comparison of efficiency ratios of BAC and WFC: https://finance.yahoo.com/news/bank-america-more-efficient-wells-151100026.html

 

I definitely see what you are saying with C, but I wonder how much is already priced in for BAC here.  1.6 p/TBV for BAC vs ~1 p/TBV for C.  I'm not too sure what price makes sense to exit this one--is it near here?

[Rasputin]

My base case scenario for 2018 eps is $1.90.  Assume no fed rate increase, similar rate environment vs 2017, no Treasury white paper relief, no tax cut, non interest expense of $53 B, $300 million saving from Berkshire's preferred conversion.  Analysts' consensus would require 2 to 3 fed rate increases starting December 2017. 

 

At $27, BAC is roughly 14 times base case earnings.

 

To me BAC is totally a different franchise vs C, no comparison.  Just look at at cost of deposit, credit card charge-off rate, loan losses iduring the 9 quarter stressed period for those 2 banks past 3 year CCAR, it's night and day to me in terms of quality of franchise, risk management. 

[Viking]

Rasputin, I agree that BAC’s business model is less risky than C. In the coming years I think BAC may carve out its own niche as a perfectly boring, very profitable and very well managed big US bank. BAC will benefit more than C if we get more rate increases and tax reform.

 

C is also undergoing its own transformation and it will be interesting to see if management is able to deliver on the lofty expectations they set at their investor day this summer.

 

If the US economy continues to chug along I continue to like the big US banks. Lots of tailwinds...

[rogermunibond]

Running a poll on what BAC warrant holders on doing on the General Discussion page.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bac-a-warrant-holders/

[tylerdurden]

Hey Rasputin - just curious whether you assumed the same NIM pick up from 2017 in your analysis for 2018E eps. I believe we had a Fed increase in March 17 and another one in June 17 right so interest pick up was partial in 2017 although BAC should get the full year pick up in 2018 assuming no additional increases in 18.

 

My base case scenario for 2018 eps is $1.90.  Assume no fed rate increase, similar rate environment vs 2017, no Treasury white paper relief, no tax cut, non interest expense of $53 B, $300 million saving from Berkshire's preferred conversion.  Analysts' consensus would require 2 to 3 fed rate increases starting December 2017. 

 

At $27, BAC is roughly 14 times base case earnings.

 

To me BAC is totally a different franchise vs C, no comparison.  Just look at at cost of deposit, credit card charge-off rate, loan losses iduring the 9 quarter stressed period for those 2 banks past 3 year CCAR, it's night and day to me in terms of quality of franchise, risk management.

[rukawa]

Wallstreet Journal had an article today on the Warrants:

https://www.wsj.com/articles/bank-bets-tied-to-government-bailouts-soar-up-to-1470-in-a-year-1509964202

 

[Rasputin]

Hey Rasputin - just curious whether you assumed the same NIM pick up from 2017 in your analysis for 2018E eps. I believe we had a Fed increase in March 17 and another one in June 17 right so interest pick up was partial in 2017 although BAC should get the full year pick up in 2018 assuming no additional increases in 18.

 

My base case scenario for 2018 eps is $1.90.  Assume no fed rate increase, similar rate environment vs 2017, no Treasury white paper relief, no tax cut, non interest expense of $53 B, $300 million saving from Berkshire's preferred conversion.  Analysts' consensus would require 2 to 3 fed rate increases starting December 2017. 

 

At $27, BAC is roughly 14 times base case earnings.

 

To me BAC is totally a different franchise vs C, no comparison.  Just look at at cost of deposit, credit card charge-off rate, loan losses iduring the 9 quarter stressed period for those 2 banks past 3 year CCAR, it's night and day to me in terms of quality of franchise, risk management.

 

I'm assuming slight increase in NII (about $0.35 B) from 2017 to 2018 due to the sale of the UK credit card. 

 

For 2018, I have $44.75 B NII plus $43 B NonII minus $53 B in NonIE minus $4 B in provisions times 0.7 minus $1.38 B in pref dividends divided by 10.54 B avg diluted sh o/s and I get $1.9 eps.

 

 

[gary17]

anyone know when they would declare q4 dividend ? thx

[rkbabang]

anyone know when they would declare q4 dividend ? thx

 

On 10/25/17 they declared a $0.12 dividend to be paid 12/29/17.  You can see their history at the following link based on past years the next one will be declared late January to early February and will be paid in late March.

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-dividends

 

 

[gary17]

anyone know when they would declare q4 dividend ? thx

 

On 10/25/17 they declared a $0.12 dividend to be paid 12/29/17.  You can see their history at the following link based on past years the next one will be declared late January to early February and will be paid in late March.

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-dividends

 

OK thanks

i thought i read they declared it and couldn't find it

and i did see their history - which is what prompted the question; it doesn't show the one declared on oct 25....    maybe someone forgot to update that table lol

[rkbabang]

anyone know when they would declare q4 dividend ? thx

 

On 10/25/17 they declared a $0.12 dividend to be paid 12/29/17.  You can see their history at the following link based on past years the next one will be declared late January to early February and will be paid in late March.

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-dividends

 

OK thanks

i thought i read they declared it and couldn't find it

and i did see their history - which is what prompted the question; it doesn't show the one declared on oct 25....    maybe someone forgot to update that table lol

 

I know. That is weird.  Other sites list it though: http://www.nasdaq.com/symbol/bac/dividend-history?symbol=BAC&selected=BAC

 

[Viking]

US financial stocks have had a great run over the past 13 months with many up +60%. Given the sizeable gains surely it is time to sell. The crazy thing is their underlying business has improved greatly in the past 12 months and this has resulted in higher profit and much higher earnings per share. This will continue into 2018.

 

Let’s looks at BAC.

Current share price = $28.15

Estimated 2018 earnings = $2.20/share

Tax reform bump (10%) = $2.40/share

Apply a 14 PE = $33.60 year end 2018 share price = 19% gain in 12 months

 

If we get a rate hike in Dec 2017 and 3 more in 2018 then my $2.20 starting estimate is low. Tax reform will likely benefit BAC more than a 10% improvement in EPS. Capital return should be higher in 2018 as I expect BAC to start returning closer to 100% of earnings starting in July. We will also get big dividend increase (min 20% and perhaps 30%). I expect more regulatory relief resulting in lower costs.

 

When I weave it all together I see the big US banks continuing to deliver 20% eps growth the next couple of years. These companies are cash generating machines and they will giving it all back to shareholders. Growing economy, higher interest rates, less regulation, smaller drag from legacy assets and now tax reform will make the US banks the gift that keeps on giving for years to come. The key will be to sit tight and let time work it’s magic.

[onyx1]

US financial stocks have had a great run over the past 13 months with many up +60%. Given the sizeable gains surely it is time to sell. The crazy thing is their underlying business has improved greatly in the past 12 months and this has resulted in higher profit and much higher earnings per share. This will continue into 2018.

 

Let’s looks at BAC.

Current share price = $28.15

Estimated 2018 earnings = $2.20/share

Tax reform bump (10%) = $2.40/share

Apply a 14 PE = $33.60 year end 2018 share price = 19% gain in 12 months

 

If we get a rate hike in Dec 2017 and 3 more in 2018 then my $2.20 starting estimate is low. Tax reform will likely benefit BAC more than a 10% improvement in EPS. Capital return should be higher in 2018 as I expect BAC to start returning closer to 100% of earnings starting in July. We will also get big dividend increase (min 20% and perhaps 30%). I expect more regulatory relief resulting in lower costs.

 

When I weave it all together I see the big US banks continuing to deliver 20% eps growth the next couple of years. These companies are cash generating machines and they will giving it all back to shareholders. Growing economy, higher interest rates, less regulation, smaller drag from legacy assets and now tax reform will make the US banks the gift that keeps on giving for years to come. The key will be to sit tight and let time work it’s magic.

 

I largely agree Viking.

 

The tax reform bump appears highly likely.

 

So, the remaining items on my radar for 2018:

 

(1) How many rate hikes,

(2) Achieving the goal of $53bln non-interest expenses,

(3) Whether provisions will continue to track charge-offs.  (Provisions are 0.4% currently vs. 0.7% historical)

(4) Loan growth

 

Rate hikes are likely 50bp-100bp, management deserves the benefit of the doubt on expenses reductions, management is on record for lower than historical provisions (3Q 2017 CC "We still think provision is expected to roughly match net charge-offs."), and loans growth should track 3% GDP.

 

It's optimistic, but if all these come together without a hiccup, 2018 could be in the $2.70-$2.80 range.  (13x = $35)

 

I wouldn't buy here, but with a single digit cost basis in a taxable account, I'm not selling.

[Viking]

BAC Is adding $5 billion to their share repurchase plan bringing the total to $17 billion (to June 2018). The story keeps getting better...

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=2321100#fbid=dJ132liOj51

 

 

CHARLOTTE, N.C.--(BUSINESS WIRE)--Dec. 5, 2017-- Bank of America Corporation today announced plans to repurchase an additional $5 billion in common stock by June 30, 2018.

 

The company previously announced plans on June 28 to repurchase $12 billion in common stock from July 1, 2017 through June 30, 2018, plus repurchases to offs

[Viking]

BAC CEO had an interview with CNBC today. Looks pretty clear that they will be returning more than 100% of earnings in next CCAR cycle. $25 billion in excess capital is more than one year of earnings.

 

From the written article on the CNBC web site: Moynihan said the buybacks were the result of the company having strong levels of excess cash — an 11.9 percent capital ratio compared to the required 9.5 percent, translating into up to $25 billion. "Our job is to move that out," he said.

 

https://www.cnbc.com/2017/12/05/bofa-ceo-moynihan-tax-reform-will-help-banks-american-society-and-the-broad-economy.html?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=104880284&yptr=yahoo

 

[gary17]

OR THEY COULD DOUBLE THE DIVIDEND!  oh well 

 

i wonder if they still think it's really undervalued at $ 29 - $30 range

but it's not like i can use dividend to buy anything else, probably use it to buy more bAC shares     

[HalfMeasure]

The financials renaissance continues.