BAC-WT - Bank of America Warrants

[Spekulatius]

I think one must distinguish between the impact of the Great Recession and reforms on banks vs individuals. It is now clear that the ECB didn’t get the banking system reformed correctly, causing a dwelling crisis. Depending on location and country, the impact was quite felt different.

 

In Germany, the global financial crisis was felt as a swift decline followed by a quick recovery. As early as 2009, the Recession was over, wealth effect was negligible, because most Germans don’t own stock and real estate didn’t go down much at all. That is why so many Germans have difficulty to understand why other have a problem. There is very little symphaty for people, institutions or countries who borrow and then get into problems. Whether than is a correct viewpoint is an entirely different matter. It also doesn’t matter to the average German , if Deutsche  Bank goes to the crapper - deposits are insured and the banking systems backbone Sparkassen and Volksbanken (owned by local government or mutual organization).

 

 

This is very different from individuals who love in Ireland, Spain, Italy or worst of all Greece, who live now through a decade of economic stagnation (Spain is actually recovering nicely). I feel the ECB with their politic keeps the banking System afloat, but also keeps it from mending itself, which makes it a difficult sector to invest in. I do think that a selloff because of Italy will probably be a buying opportunity (except for Italian banks), since I think foreign banks have abstained from buying Italian treasuries after the first crisis a couple of years ago. So, maybe there is an opportunity to Maske a nice trade in the near term future.

[gary17]

RBC's 2018 CCAR estimates-

rbc-2018ccar_US_Banks.pdf

[John Hjorth]

Thank you a lot for sharing, Gary.

[Viking]

The Fed meeting today had more good news for the big US banks. The announced 25 basis point increase in the Fed Funds rate will improve net interest income and profitability immediately. More importantly, the Fed increased its projections for GDP growth for 2018. Stronger GDP growth will result in stronger earnings. The ‘story’ continues to get better for the big US banks...

 

http://www.calculatedriskblog.com/2018/06/fomc-projections-and-press-conference.html

[Viking]

BAC presented June 12 at the Morgan Staley Financials Conference. Focus was their US consumer bank (38% of net income). Very impressive what they have done the past 5 years; they look like they may be leading in the shift to electronic/digital/mobile. I wonder if BAC currently has the strongest consumer bank in the US? Better then JPM and WFC? What do US board members think?

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-irhome#fbid=dJ132liOj51i

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDA2Nzk0fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636643429722332975

 

- 36 million active digital users; total of 67 million customers.

 

https://bankinnovation.net/2018/01/chase-citigroup-display-strong-mobile-user-growth-as-wells-fargo-growth-dips/

 

 

[Cigarbutt]

The Fed meeting today had more good news for the big US banks. The announced 25 basis point increase in the Fed Funds rate will improve net interest income and profitability immediately. More importantly, the Fed increased its projections for GDP growth for 2018. Stronger GDP growth will result in stronger earnings. The ‘story’ continues to get better for the big US banks...

 

http://www.calculatedriskblog.com/2018/06/fomc-projections-and-press-conference.html

 

I think I see what you mean (when higher growth will manifest and when it will be recognized by markets?) but the wording implies forecasting enthusiasm.

https://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-projections-optimism-federal-reserve/

 

The point of this specific post is not that the FED is over-optimistic; it's just that it may represent a neutral input as GDP may end up lower or higher.

[Spekulatius]

BAC presented June 12 at the Morgan Staley Financials Conference. Focus was their US consumer bank (38% of net income). Very impressive what they have done the past 5 years; they look like they may be leading in the shift to electronic/digital/mobile. I wonder if BAC currently has the strongest consumer bank in the US? Better then JPM and WFC? What do US board members think?

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-irhome#fbid=dJ132liOj51i

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDA2Nzk0fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636643429722332975

 

- 36 million active digital users; total of 67 million customers.

 

https://bankinnovation.net/2018/01/chase-citigroup-display-strong-mobile-user-growth-as-wells-fargo-growth-dips/

 

I believe that from a consumer perspective, BAC and JPM are the strongest franchises. WFC branches were better managed IMO (not sure now, since it has been 3 years since I was in one), but their online presence feels really dated.

[Viking]

The Fed meeting today had more good news for the big US banks. The announced 25 basis point increase in the Fed Funds rate will improve net interest income and profitability immediately. More importantly, the Fed increased its projections for GDP growth for 2018. Stronger GDP growth will result in stronger earnings. The ‘story’ continues to get better for the big US banks...

 

http://www.calculatedriskblog.com/2018/06/fomc-projections-and-press-conference.html

 

I think I see what you mean (when higher growth will manifest and when it will be recognized by markets?) but the wording implies forecasting enthusiasm.

https://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-projections-optimism-federal-reserve/

 

The point of this specific post is not that the FED is over-optimistic; it's just that it may represent a neutral input as GDP may end up lower or higher.

 

Cigarbutt, I agree that since 2008 the Fed has been a chronically too high with its forecasts. It looks to me like we may have reached an inflexion point where forecasts now are too low (not just GDP but also inflation) and future revisions will be higher. Lots to learn in 2H 2018. :-)

 

The US economy looks like it is running pretty much perfect right now. It is allowing the Fed to normalize interest rates and unwind QE. Simply amazing, especially when compared to the Euro Zone and Japan; what are these two going to do when the next recession hits in a couple of years?

[racemize]

BAC presented June 12 at the Morgan Staley Financials Conference. Focus was their US consumer bank (38% of net income). Very impressive what they have done the past 5 years; they look like they may be leading in the shift to electronic/digital/mobile. I wonder if BAC currently has the strongest consumer bank in the US? Better then JPM and WFC? What do US board members think?

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-irhome#fbid=dJ132liOj51i

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDA2Nzk0fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636643429722332975

 

- 36 million active digital users; total of 67 million customers.

 

https://bankinnovation.net/2018/01/chase-citigroup-display-strong-mobile-user-growth-as-wells-fargo-growth-dips/

 

This isn't exactly on point, but I remember Berkowitz talking about BAC's potential in 2010 (I think?) and that it could potentially out Wells Fargo Wells Fargo.  I think he was referring to the deposit franchise.  As an exercise, I went and looked at total deposits and the interest cost of those deposits for the big 4:

 

Deposit Interest Expense Average Deposits Cost

BAC 1.93                         1309                         0.15%

C     6.585                         960                         0.69%

JPM 2.857                         1443                         0.20%

WFC 3.013                         1305                         0.23%

 

 

I think JPM's deposit mix is quite different than BAC/WFC though--not sure how it will hold up in rising interest rate environments.

 

[Rasputin]

DFAST 2018 results are out

 

https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf

 

Only 1 participant out of 35 firms MADE (not lost) over $10 B pre-tax over the 9 quarter severely adverse scenario period.  GS, MS were hit severely, GS is only 0.1% to minimum SLR before capital ask...

[John Hjorth]

It'll be my favorite reading this coming weekend! -That severely adverse scenario is just so daunting, if one looks at the assumptions ... more onerous with regard to assumptions than the 2017 DFAST. I really hope that the world never go there.

 

In the RBC report posted here by Gary we can see the actual development under GFC as comparison, and that's just water compared to the stipulated serverly adverse scenario in DFAST 2018.

[Spekulatius]

DFAST 2018 results are out

 

https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf

 

Only 1 participant out of 35 firms MADE (not lost) over $10 B pre-tax over the 9 quarter severely adverse scenario period.  GS, MS were hit severely, GS is only 0.1% to minimum SLR before capital ask...

 

I am surprised  how poorly GS, MS and STT did in the adverse scenario. The adverse scenario looked pretty bad, but the assumption were for a fairly swift recovery recovery  and a spreads increase much less than during the financial crisis in 2008/2009. I believe that if such a scenario would occur, the reflexivity would mean that banks would do worse than what is actually modeled.

 

The US subs of the crappy European banks DB and BCS looked actually pretty good in comparison.

[sleepydragon]

DFAST 2018 results are out

 

https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf

 

Only 1 participant out of 35 firms MADE (not lost) over $10 B pre-tax over the 9 quarter severely adverse scenario period.  GS, MS were hit severely, GS is only 0.1% to minimum SLR before capital ask...

 

GS has been cost cutting for years - cuz they couldn’t make money, and they couldn’t make money because they want to cut expense and so they pushed out all the highly paid ones, who went to firms like JPM, MS and Citi and brought clients and ideas with them. The only people who are still there don’t know how to make money but are enjoy their partner titles and pays. The politics are very bad there and people are not treated fairly. Today I found someone has a blog for my ex-boss at GS: http://adamkornisapieceofshit.blogspot.com/?m=1

 

 

I am surprised  how poorly GS, MS and STT did in the adverse scenario. The adverse scenario looked pretty bad, but the assumption were for a fairly swift recovery recovery  and a spreads increase much less than during the financial crisis in 2008/2009. I believe that if such a scenario would occur, the reflexivity would mean that banks would do worse than what is actually modeled.

 

The US subs of the crappy European banks DB and BCS looked actually pretty good in comparison.

[John Hjorth]

GS has been cost cutting for years - cuz they couldn’t make money, and they couldn’t make money because they want to cut expense and so they pushed out all the highly paid ones, who went to firms like JPM, MS and Citi and brought clients and ideas with them. The only people who are still there don’t know how to make money but are enjoy their partner titles and pays. The politics are very bad there and people are not treated fairly. Today I found someone has a blog for my ex-boss at GS: http://adamkornisapieceofshit.blogspot.com/?m=1

 

sleepydragon,

 

It appears like this person is suffering from some kind of PTSD or whatever, and needs help to get back on track in life, instead of getting mentally stuck in the mud in the - most likely - not pleasant past. A coach or a psychiatrist would fit.

 

- - - o 0 o - - -

 

Now back to BAC.

[Rasputin]

Spek,

 

I'm not sure if you are reading the right scenario.  Only read the SEVERELY adverse scenario, the fed will get rid of the adverse scenario next year.

 

For SEVERELY adverse, these are the data for BBB corporate yield-10yr treasury yield spread:

 

Q1 2018 4.7

Q2 2018 5.3

Q3 2018 5.5

Q4 2018 5.6

Q1 2019 5.7

Q2 2019 5.5

Q3 2019 5.1

Q4 2019 4.7

Q1 2020 4.3

Q2 2020 3.9

Q3 2020 3.5

Q4 2020 3.1

Q1 2021 2.6

 

Historical data during past GFC:

 

Q1 2008 2.6

Q2 2008 2.7

Q3 2008 3.1

Q4 2008 5.7

Q1 2009 5.8

Q2 2009 4.5

Q3 2009 3

Q4 2009 2.4

Q1 2010 1.9

Q2 2010 2

Q3 2010 2.2

Q4 2010 2

Q1 2011 1.9

 

I would also recommend reading the severely adverse scenario published February 1, 2018 in its entirety to understand the severity of the scenario.

 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180201a.htm

[sleepydragon]

GS has been cost cutting for years - cuz they couldn’t make money, and they couldn’t make money because they want to cut expense and so they pushed out all the highly paid ones, who went to firms like JPM, MS and Citi and brought clients and ideas with them. The only people who are still there don’t know how to make money but are enjoy their partner titles and pays. The politics are very bad there and people are not treated fairly. Today I found someone has a blog for my ex-boss at GS: http://adamkornisapieceofshit.blogspot.com/?m=1

 

sleepydragon,

 

It appears like this person is suffering from some kind of PTSD or whatever, and needs help to get back on track in life, instead of getting mentally stuck in the mud in the - most likely - not pleasant past. A coach or a psychiatrist would fit.

 

- - - o 0 o - - -

 

Now back to BAC.

 

Lol. I agree with you. I noticed the blog is setup in 2012 and this guy is still paying for the dns name.

[Rasputin]

GS has been cost cutting for years - cuz they couldn’t make money, and they couldn’t make money because they want to cut expense and so they pushed out all the highly paid ones, who went to firms like JPM, MS and Citi and brought clients and ideas with them. The only people who are still there don’t know how to make money but are enjoy their partner titles and pays. The politics are very bad there and people are not treated fairly. Today I found someone has a blog for my ex-boss at GS: http://adamkornisapieceofshit.blogspot.com/?m=1

 

sleepydragon,

 

It appears like this person is suffering from some kind of PTSD or whatever, and needs help to get back on track in life, instead of getting mentally stuck in the mud in the - most likely - not pleasant past. A coach or a psychiatrist would fit.

 

- - - o 0 o - - -

 

Now back to BAC.

 

For BAC specific, BAC continues to have best in class loan loss rate during the 9 quarter severely adverse scenario period.  5% for BAC, 5.5% for WFC, 6.4% for both USB and JPM, 7% for C.

[sleepydragon]

GS has been cost cutting for years - cuz they couldn’t make money, and they couldn’t make money because they want to cut expense and so they pushed out all the highly paid ones, who went to firms like JPM, MS and Citi and brought clients and ideas with them. The only people who are still there don’t know how to make money but are enjoy their partner titles and pays. The politics are very bad there and people are not treated fairly. Today I found someone has a blog for my ex-boss at GS: http://adamkornisapieceofshit.blogspot.com/?m=1

 

sleepydragon,

 

It appears like this person is suffering from some kind of PTSD or whatever, and needs help to get back on track in life, instead of getting mentally stuck in the mud in the - most likely - not pleasant past. A coach or a psychiatrist would fit.

 

- - - o 0 o - - -

 

Now back to BAC.

 

For BAC specific, BAC continues to have best in class loan loss rate during the 9 quarter severely adverse scenario period.  5% for BAC, 5.5% for WFC, 6.4% for both USB and JPM, 7% for C.

 

BNY is 3% :)

[Rasputin]

lol, BNY is a custodial bank with no credit card and minimal CRE exposure (highest loss rate)

[CorpRaider]

What are they assuming block chain/distributed ledger decimates its bidness or something?  ;D

[Spekulatius]

Hello, thanks for the data. I guess I didn’t compare the right spread data and thought that the spreads during the GFC were much higher. I know I bought some investment grade bonds for ~15% yield, but that may have been an outlier.

 

I do understand that the extremely adverse scenario is designed to mimic the GFC, so It can!t be a walk in the park. I still think that no model can account for the reflexivity or reverse lollapaloza effects of a real crisis.

[LC]

I do understand that the extremely adverse scenario is designed to mimic the GFC, so It can!t be a walk in the park. I still think that no model can account for the reflexivity or reverse lollapaloza effects of a real crisis.

 

Let's also realize the LF models built for CCAR are designed to minimize NCL, in addition to the backwards-looking limitation you describe above.

[Viking]

As discussed previously, weak European competitors is another reason to like the big 4 US banks. Surprising to me that DB seems to keep getting weaker; with the German and US economies firing on all cylinders I would have expected this bank over the past couple of years to be turning the corner. Looks like it is in a holding pattern (in a bad place). What is DB going to do when the next recession hits?

 

https://finance.yahoo.com/news/deutsche-bank-woes-positive-major-161026205.html

[John Hjorth]

It's actually an interesting question of yours, Viking,

 

To me, DB is just a bad European bank, that never really got fixed during the business cycle after the GFC. I think the reasons for that are several. So please don't take me condecending here [ : - ) ], but I actually think that DB will wake up when the next recession hits and just ask: "What?"

 

Perhaps we could continue to discuss this in the DB topic. It's actually a sad story, a real calamity, of enormous dimensions. [similar, and yet different to the story of C.]

 

- - - o 0 o - - -

 

Somehow, it's a privilege to only have the "problem" right now to should wait for the US CCAR Announcements for further 24 hours and 22 minutes. [ : - ) ]

[Viking]

John, yes, I am also looking forward to the CCAR announcement tomorrow.

 

For BAC it will be interesting to see how much they are approved to return in total. RBC is estimating $26 billion, which is about 12 month earnings. Moynihan has said repeatedly that BAC has about $16 billion in excess capital. I would love it if BAC pulled a C (return more than 100% of earnings) and was approved to return $30 billion over the next 12 months.

 

The other thing I am watching closely is the dividend. It is currently $0.12/quarter. RBC is estimating this increasing to $0.22/quarter. I will be pleasantly surprised if this amount happens as it will move the dividend yield to 3.1%.