BAC-WT - Bank of America Warrants

[maxthetrade]

I pay 27-42 pct. on realized gains no matter the holding period (same with dividends). In my pension account I pay 14,7 pct. on gains once a year - no matter if the gains are realized or not.

 

Wow, that sounds bad! Where do you live?

 

[John Hjorth]

kab60 is Danish, like I am. There is a topic in the Personal Finance forum about the Danish capital gain taxes, where we could continue whining, to keep this topic BAC related.

[sleepydragon]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

 

If i have a gain of 8 digits I would be finding a nice beach to surf than worry about taxes LOL 

but may be that's why i don't get 8 digit gains lol

 

8 digits of capital gain tax?!

Does it include the digits after the decimal  point? Or this has to be a show off post. :)

[sleepydragon]

Gary, another aspect of the big banks that I do not think is built into their historical valuation is capital return over the next 5 years. Most of the big banks will likely be paying out +100% of earnings for the next few years. They are all overcapitalized by $15-$20 billion and this capital will also be returned over time. Shares outstanding will be coming down by 5-7% (depending on bank) and dividends will be growing at 20-25% per year (with yields in the 2 to 2.5% range.

 

Surely a business that is returning +100% of earnings to shareholders (and still growing total revenue and total profits) is worth a higher PE multiple than a business retaining most of its earnings and growing at the same rate.

 

Good point and I agree.  The way I think about this is to value the extra capital return separately.  I see $20bln that Moynihan referenced, plus maybe an additional $10-$15bln in DTA remaining worth $2-$3/share on top of the baseline P/E. 

 

If all goes as planned by the end of 2018 and a run rate of $2.60 * 11x = $28.60 , add $3.00 and we are at $31.60.

 

The reality is that all is not likely to go as planned.  I'm not seeing a lot of short term upside at current price of $29.

 

Onyx1, if u think banks are fully valued and u don't want to sell BAC due to tax, why aren't you selling WFC instead? Thanks.

[onyx1]

Gary, another aspect of the big banks that I do not think is built into their historical valuation is capital return over the next 5 years. Most of the big banks will likely be paying out +100% of earnings for the next few years. They are all overcapitalized by $15-$20 billion and this capital will also be returned over time. Shares outstanding will be coming down by 5-7% (depending on bank) and dividends will be growing at 20-25% per year (with yields in the 2 to 2.5% range.

 

Surely a business that is returning +100% of earnings to shareholders (and still growing total revenue and total profits) is worth a higher PE multiple than a business retaining most of its earnings and growing at the same rate.

 

Good point and I agree.  The way I think about this is to value the extra capital return separately.  I see $20bln that Moynihan referenced, plus maybe an additional $10-$15bln in DTA remaining worth $2-$3/share on top of the baseline P/E. 

 

If all goes as planned by the end of 2018 and a run rate of $2.60 * 11x = $28.60 , add $3.00 and we are at $31.60.

 

The reality is that all is not likely to go as planned.  I'm not seeing a lot of short term upside at current price of $29.

 

Onyx1, if u think banks are fully valued and u don't want to sell BAC due to tax, why aren't you selling WFC instead? Thanks.

 

 

I own WFC as well and have very similar issues.  Bought in 2011.

[longlake95]

Hey Onyx, forget what you bought in 2011, what are buying now? LOL... ;)

[Dazel]

 

 

Made a killing here all!

Thanks for all your hard work.

 

Dazel

[HalfMeasure]

Gary, another aspect of the big banks that I do not think is built into their historical valuation is capital return over the next 5 years. Most of the big banks will likely be paying out +100% of earnings for the next few years. They are all overcapitalized by $15-$20 billion and this capital will also be returned over time. Shares outstanding will be coming down by 5-7% (depending on bank) and dividends will be growing at 20-25% per year (with yields in the 2 to 2.5% range.

 

Surely a business that is returning +100% of earnings to shareholders (and still growing total revenue and total profits) is worth a higher PE multiple than a business retaining most of its earnings and growing at the same rate.

 

Good point and I agree.  The way I think about this is to value the extra capital return separately.  I see $20bln that Moynihan referenced, plus maybe an additional $10-$15bln in DTA remaining worth $2-$3/share on top of the baseline P/E. 

 

If all goes as planned by the end of 2018 and a run rate of $2.60 * 11x = $28.60 , add $3.00 and we are at $31.60.

 

The reality is that all is not likely to go as planned.  I'm not seeing a lot of short term upside at current price of $29.

 

Onyx1, if u think banks are fully valued and u don't want to sell BAC due to tax, why aren't you selling WFC instead? Thanks.

 

 

I own WFC as well and have very similar issues.  Bought in 2011.

 

I think this is a great example of why Buffett's investing style makes sense in taxable accounts. I would agree that BAC/WFC are close to fair compared to historical averages or in the context of a regular market environment, but I actually would contend that they're still on the cheap side of fair given the low rate environment (which is simultaneously inflating valuations across the rest of the market and putting a lid on NIMs and subsequently earnings power for the banks). Given rate tailwinds, tax reform, potential deregulation, and quite frankly what I believe is underappreciated consolidation post-financial crisis, I would say you could make the argument to be buying bank stocks today over any other sector in the US and I would have a hard time arguing with it (aside from the moot argument that the really fat pitch was financials in mid-2016).  But at today's levels, I think you have some fantastic businesses trading at fair prices without a whole lot of downside. At ~12x tax-reformed earnings across the sector or ~14x pre-tax-reform, you're getting a 7-8% earnings yield in what is still a depressed rate environment - sure the market is expecting 2-3 hikes in 2018 but the rate benefit won't bake into BAC/WFC earnings until the book reprices which likely takes a year or so, so you're really getting a 7-8% earnings yield (which will mostly be plowed into shareholder returns via buybacks/dividends which are both more tax efficient in a taxable account than realizing capital gains by selling) with visibility on abnormal earnings growth for the next 2-3 years (until we get back to at least 400bps on the 10-year). Not only is it hard to find an opportunity with better prospects that a 7-8% earnings yield + growth, it's going to be even harder when you add to that hurdle rate the fact you'll be realizing a large tax drag via capital gains upfront. While financials historically sell at a discount to the market, I actually think this is one of the few environments where you could make the argument that they should trade closer to a market multiple (rate tailwind, tax tailwind likely disproportionately benefits financials vs the market, high capital return prospects, and financials are relatively lower risk compared to history given the heightened regulation resulting in a more utility-like exposure).

 

Now, depending on position sizing, I could understand trimming and realizing some tax, but I can completely understand the argument to hold and eventually converting to common stock to defer capital gains. Delaying the capital gain also lets you continue to extract the dividend on the portion of the capital gain that would go to the government once you realize the tax impact.

[Viking]

The key moving forward is what will BAC earn in 2018? Most people right now have no idea as there are too many moving parts. Currently on Yahoo Finance, BAC is projected to earn $2.27 in 2018. This is up from $2.15 that was estimated 90 days ago. For comparison Yahoo is forecasting BAC will earn $1.81 in 2017.

 

It is clear that analysts have been slow to update their forecasts to reflect tax reform, higher share repurchases, growing economy etc. From what I read it appears tax reform will benefit BAC about $0.35-$0.40 per share. One of the big Canadian banks just updated a couple of days ago their EPS estimates for BAC for 2018 to $2.60 and for 2019 to $3.10 per share.

 

Shares are trading currently at $30.33 = 11.7PE to 2018 earnings est and 9.8PE to 2019 earnings est. I think the chance for earnings upside is at least as great as earnings downside. Bottom line is bank stocks are still cheap. My guess is as the banks release results this week analysts will get the clarity they need from management and we will see earnings estimates and price targets increase materially. This should lead to further price appreciation.

 

I would love for people to share the new earnings per share estimates their research houses are publishing post tax reform as it does appear to be a bit of a mystery right now :-)

[John Hjorth]

I have to agree with Dazel here.

 

Extremely good investment during the last years. "Unfortunately", only the Lady of the House and I in our family hold BAC. Entry point is 12. Never bought more, never sold anything. I regret the first part!

 

- - - o 0 o - - -

 

This evening I have read up this topic since May 8, 2017 [sanjeev's post #7085 in this topic] - i.e. well before the CCAR announcement for BAC.

 

What are my fellow board members stance about the BAC DTAs going forward short term, and market reaction to changes?

 

The BAC DTAs are more or less covered in the following posts in this topic here:

 

Post #7100 [by Viking]

Post #7101 [by Joel [racemize]]

Post #7134 [by Joel [racemize]]

Post #7155 [by Viking]

 

- - - o 0 o - - -

 

Some numbers:

 

BAC DTAs [Net] year end 2016: USD 19.226 B [after allowance USD 1.117 B], ref. Financial Statements 2016, note 19, p. 193.

BAC BV 2017Q3 : 272.459 B, ref. BAC 2017Q3 Q-10, p. 71.

 

Estimated BAC DTAs end of 2017Q3:

 

= USD 19.226 B minus [change in DTAs 2016YE to end of 2017Q3 inclusive]

= USD 19.226 B minus USD 5.043 B, ref. cash flow statement 2017Q3, ref. 2017Q3 Q-10, p. 73

= USD 14.183 B.

 

Rough estimate of BAC DTAs 2017YE [at 35 percent corporation tax rate]:

 

= USD 14.183 minus [1/3 * USD 5.043]

= USD 12.502 B.

 

Non cash, "extraordinary" BAC ernings hit 2017 due to US tax reform:

 

= USD 12.502 * [[35 - 21]/35]

= USD 5.715 B.

 

- - - o 0 o - - -

 

How do my fellow board members invested in BAC think about and relate to that short term?

[Viking]

John, on December 22 it was reported that BAC provided a preliminary estimate:

 

“Bank of America expects to take a roughly $3 billion hit to fourth-quarter net income after the U.S. tax bill slashed corporate rates. The reduction is “primarily” from a lower value of net deferred tax assets, according to a filing Friday by the Charlotte, N.C.-based firm. So-called DTAs pile up in cases where a company loses money and can’t immediately enjoy the tax benefits of those losses.”

 

https://www.americanbanker.com/articles/b-of-a-says-tax-act-to-force-3b-earnings-cut-in-4q

 

All of the banks will be taking a one time earnings hit when they report Q4 starting this week. My guess is the amounts have been telegraphed in advance and so should be baked into prices. The outlier (in terms of size) is Citi and their $20 billion writedown. There will be lots of information coming out when the banks report and it will be interesting to see how the market responds; as the year develops I expect forecast earnings per share to be the key driver of stock prices.

[John Hjorth]

Thanks a lot, Viking,

 

So much for spending the time to find the numbers & doing the calculations. However, I have to ask: Where is the information on the BAC Investor relations website? -So far, I can't find it. I might be looking the wrong place.

[Viking]

John, if you go to BAC Investor Relations / Financial Information / SEC Filings and then scroll to Dec 22 and the 8-K filing. Below is the actual information provided by BAC (pretty top line).

 

ITEM 8.01.

Other Events.

 

On December 22, 2017, Bank of America Corporation (the “Corporation”) announced following enactment of the Tax Cuts and Jobs Act (the “Tax Act”), it currently estimates net income for the quarter ending December 31, 2017, will include a reduction of approximately $3 billion as a result of the Tax Act, primarily from a lower valuation of certain net deferred tax assets. The Corporation will continue to analyze the Tax Act to determine the full effects of the new law, including the new lower corporate tax rate, on the Corporation’s financial statements and operations. The Corporation will announce financial results for the quarter and year ended December 31, 2017, on January 17, 2018.

 

http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=71595&fid=15351694

 

[onyx1]

I'm concentrated in BAC, and have a 90% allocation to equities in a taxable account with large capital gains.  I view BAC risk within this context. 

 

BAC has tailwinds, but in order to achieve $2.60 run rate by the end of 2018, a lot of things have to go right.  Three additional rate increases, expenses to $53bln, provisions remain at historically low 0.4%, continued buybacks, 3% asset growth, no unexpected problems. 

 

Even if everything develops as planned, BAC will fall short of $2.60 for 2018 EPS because these positive developments will be spread throughout the calendar year.

 

For these reasons and a sense there is more euphoria than pessimism in bank stocks, I removed most of the risk (I was paid a small amount for a $27 put by selling the upside above $31).

 

This is a short term solution, however, and only lasts until April 2018.

 

 

 

I can extend the risk reversal indefinitely.  I may choose to as I need more time to deal with the tax issues.

 

I live in a SALT state in the northeast with a 9% state tax rate.  If I were to sell everything, the dollar amount I would pay in state taxes is stupid, and I can no longer deduct state against federal. 

 

By changing my residence to a zero tax state, I can buy a nice home with the tax money saved. 

 

Another consideration: it's -2 this morning in the northeast, but in South Florida residents will enjoy a high of 74. 

 

Time to take another look at realtor.com

 

[John Hjorth]

John, if you go to BAC Investor Relations / Financial Information / SEC Filings and then scroll to Dec 22 and the 8-K filing. Below is the actual information provided by BAC (pretty top line).

 

ITEM 8.01.

Other Events.

 

On December 22, 2017, Bank of America Corporation (the “Corporation”) announced following enactment of the Tax Cuts and Jobs Act (the “Tax Act”), it currently estimates net income for the quarter ending December 31, 2017, will include a reduction of approximately $3 billion as a result of the Tax Act, primarily from a lower valuation of certain net deferred tax assets. The Corporation will continue to analyze the Tax Act to determine the full effects of the new law, including the new lower corporate tax rate, on the Corporation’s financial statements and operations. The Corporation will announce financial results for the quarter and year ended December 31, 2017, on January 17, 2018.

 

http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=71595&fid=15351694

 

Thank you a lot [!] for the help & sharing here, Viking,

 

This post of yours has calmed me down and has been providing at least some comfort. After reading it, I agree with you, with the analyst coverage etc. for BAC, that this issue must now be priced in by the market.

 

- - - o 0 o - - -

 

PS: It helps a lot not to try to find a BAC SEC filing on the C website ... *self-slap*

 

 

 

 

[John Hjorth]

I'm sorry for double posting here,

 

onyx1, your condition is - after all - just partly - "a condition".

 

Personally, I distinguish between "problems" and "conditions".

 

"Problems " are issues, that can be solved/removed - one way, or another.

"Conditions" are issues, that one just has to live lwith.

 

- - - o 0 o - - -

 

Happy real estate hunting in the South of the US.

[onyx1]

I'm sorry for double posting here,

 

onyx1, your condition is - after all - just partly - "a condition".

 

 

Spot on John.  My wife regularly reminds me of my tunnel vision.  ::)

[Drake]

Today BAC.WS.B is in the money the first time! And still more than 10 months to go. Amazing. Yippie!

 

Hopefully, patience will continue to be rewarded.

 

:)

[Viking]

BAC reported solid Q4 earnings today. Moving forward, their tax rate in 2018 will fall from an effective rate of 29% to 20%. My back of the envelope math estimates lower taxes alone will increase earnings in 2018 by $4 billion. Of all the things the Trump administration could do to help the big banks tax reform is a slam dunk.

 

In 2017 BAC earned about $1.80/share (net the one time charge due to tax reform).

In 2018 it looks like BAC should earn $2.60/share = 44% increase.

In 2019 early estimates are BAC should earn $3.10/share = 19% (over 2018)

 

Shares are currently trading at about $31.00

2017 PE = 17.2 (trailing) - shares look expensive

2018 PE = 11.9 (current year) - shares look cheap

2019 PE = 10.0 (next year) - shares look very cheap

 

In the first half of 2017 BAC traded at about $23/share; 2017 earnings estimates were $1.80 = 12.7PE. Moving to today, $2.60 x 12.7 = $33. BAC shares are cheaper today than they were 12 months ago.

 

Dividend: BAC said on the call that they view a 30% payout ratio as a target and with lower taxes (and much higher earnings) the dividend will be moving much higher in 2018.

Current dividend = $0.12 x 4 = $0.48/share = 1.55% yield ($31 share price)

Possible dividend July 2018 = $2.60 x 0.30 = 0.78/ share = 2.5% yield ($31 share price)

 

Capital return:

BAC should have net earnings of around $26.6 billion in 2018 and I would expect 100% of earnings get returned to investors in 2018 CCAR. This will allow BAC to increase the dividend materially and also reduce shares outstanding by about 5 or 6%.

 

ROTCE was 11% in 2017 and BAC guided this to increase to 12.5% in 2018

ROA was 0.93% in 2017 and BAC guided this to increase to 1.03% in 2018.

As these metrics improve the PE multiple for BAC should expand.

 

The following catalysts would result in higher earnings for BAC in 2018:

1.) US GDP growth accelerates

2.) Fed raises rates 4 times (2 to 3 is currently built into estimates)

3.) regulators ease bank rules

The following would result in much higher stock price for BAC in 2018:

4.) Mr Market falls in love with bank stocks and bids up PE ratio

 

When I weave it all together and once investors get comfortable with the earnings jump that will be coming in 2018 my guess is BAC will trade at closer to $35 and by year end we could see $37 (12 x $3.10 2019 est earnings). At $37 current owners would see about a 20% return (with the stock trading at $31 today). We could also easily see BAC hit $40 in 2018 if a few of the catalysts materialize.

[marazul]

Thank you for the post Viking. I agree on most of your points and direction. However, I don´t understand how you get to 18 EPS of $2.60. Assuming the 12.5% implied ROTCE and assuming an average TBV per share of ~$18 for FY ´18, yields something in the range of $2.25. Care to expand?

[HalfMeasure]

Thank you for the post Viking. I agree on most of your points and direction. However, I don´t understand how you get to 18 EPS of $2.60. Assuming the 12.5% implied ROTCE and assuming an average TBV per share of ~$18 for FY ´18, yields something in the range of $2.25. Care to expand?

 

My interpretation from the call was that 2017 ROTCE = ~11% and tax reform alone would have added 150bps. 2017 ROTCE doesn't  fully bake all 2017 rate hikes as BAC reprices their book, so 2018 numbers should look better all-else-equal on that basis alone, plus there will be incremental hikes in 2018 (debatable how many, but >0 seems like a forgone conclusion). Essentially I view that 12.5% number is a low bar that BAC should leap over in 2018.

[Viking]

Marazul, sorry, the numbers I provided for ROTCE and ROE were off my notes from the conference call and they are not meant to forecast 2018 earnings (provided to demonstrate BAC management expects a material improvement in 2018). Halfmeasure explains it well below.

 

Here is how I come up with $2.60 in earnings in 2018:

Net earnings = $26.3 billion

Avg shares outstanding = 10.1

[onyx1]

When I weave it all together and once investors get comfortable with the earnings jump that will be coming in 2018 my guess is BAC will trade at closer to $35 and by year end we could see $37 (12 x $3.10 2019 est earnings). At $37 current owners would see about a 20% return (with the stock trading at $31 today). We could also easily see BAC hit $40 in 2018 if a few of the catalysts materialize.

 

Viking I hope you're right, but the surge happens after Q1 earnings.  I'm capped out at $31 until then.  Today's price price action (DOW +320, BAC flat) gives me a little hope BAC won't run up right away.

[Viking]

Onyx, there is so much important stuff for the banks going on right now I think it will take until June CCAR announcements for everything to be understood and more reflected in share prices. I simply do not mind holding the shares through the volatility (like today) as I am confident in where we are going. I do not want to not be in the stock and have it move quickly.

[Viking]

Nice summary from Motley Fool on BAC’s Q4 results: https://finance.yahoo.com/news/8-key-takeaways-bank-america-121200311.html