BAC-WT - Bank of America Warrants

[Txvestor]

Yet to convert. Why can't one pay the warrant conversion price at the appropriate time and keep the shares on a 1:1 conversion basis?

[lschmidt]

Terms of that TARP warrant only support cashless exercise AFAIK.

[Viking]

Calculated Risk provided an update on many of the key US economic stats. Bottom line, the US economy continues to perform very well. This should be supportive of earnings of the big US banks.

 

https://www.calculatedriskblog.com/2018/07/q2-review-ten-economic-questions-for.html

 

[John Hjorth]

Thank you for sharing that particular blog, Viking.

 

I like the way Mr. McBride works on & with the blog, putting his own expectations on the line and online, and then systematically does follow-ups. I've started following him on Twitter.

 

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2018Q2 are now out for three of the Big Four US banks - BAC will be the last one to report on Monday. It looks good on overall basis, but there is differencies in the reported numbers that seem to me to become clearer and clearer.

 

C doing OK, but not in any way flamboyant - I would say basically as expected, the numbers for WFC are affected by the FED straightjacket, & JPM now really starting to pull away from the two others in the reporting today. For JPM, I think net profit of 34 B is within reach for 2018, after generating ~ USD 25 B the last three years. Simply mindbogling to  think about it, even taking the tax reform into consideration. I expect BAC to follow JPM monday, as right wingman in the slipstream of JPM.

[Viking]

John, I have followed Calculated Risk since around 2005 and his analysis/advice helped me miss the downdraft in stocks in the 2008/2009 housing crash and stock market meltdown. I also like that he is fairly neutral polically.

 

I agree with your summary on bank results :-) JPM is the one to buy and forget about. I wonder when analysts will start to really push C to start to sell off more pieces. WFC continues to be the head scratcher for me... not sure what to make of its prospects moving forward.

 

What is amazing to me is how well the US consumer franchises are performing for the big banks (top line growth rate and profitability). If the US economy continues to grow these business lines will continue to grow above average. It would be interesting to calculate what these businesses on their own would be worth.

 

I will spend the weekend digesting the earnings information from the various banks. Let’s hope BAC continues its trend of posting solid results when it reports on Monday.

[HalfMeasure]

What a quarter, and on the back of a flattening curve...

[Viking]

Yes, BAC results looks good. Better than C. But not as good as JPM. Results for all big 4 banks came in on trend and about as one would expect. Bottom line, US economy, consumer and businesses are all doing well and banks with a US exposure are benefitting (WFC excepted). Most importantly, the US economy is not slowing down but looks like it is accelerating. Near future earnings picture for the big banks looks very bright. I will dig more into BAC results the next couple of days when I can find some time :-)

[Junto]

What a quarter, and on the back of a flattening curve...

 

People are overreacting to the flattening yield curve spin. You have to remember where deposit costs started and the ability of these banks to hold rates paid on depositories down.  There are not many banks doing long-term investments in today's marketplace. The increase in the immediate to 5 year time frame is the best indicator of profit opportunity.

 

Framed as it relates to the mega banks. Regional and smaller banks are not as sheltered from rising depository costs.

[Viking]

Jamie Dimon was asked about the flattening yield curve during the JPM conference call on Friday. He said it is not an issue as long as the economy was performing well (which it is). He said they were monitoring the situation but were not concerned right now. I follow Calculated Risk for all things related to the US economy. and he currently does not have the US even on recession watch.

[HalfMeasure]

What a quarter, and on the back of a flattening curve...

 

People are overreacting to the flattening yield curve spin. You have to remember where deposit costs started and the ability of these banks to hold rates paid on depositories down.  There are not many banks doing long-term investments in today's marketplace. The increase in the immediate to 5 year time frame is the best indicator of profit opportunity.

 

Framed as it relates to the mega banks. Regional and smaller banks are not as sheltered from rising depository costs.

 

Definitely agree. I'm just glad BAC is proving it to the market - all else equal higher long rates would be better, but clearly it's not as necessary as the market feared.

[Viking]

Jim Cramer (mad Money) had Brian  Moynihan on for a 9 minute interview (these come across like an infomercial): https://www.cnbc.com/2018/07/16/bank-of-america-ceo-mobile-banking-strength-not-just-from-millennials.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo

 

1.) US economy is smoking and accelerating

- consumer spending in 1H +3% in 2016, +6% in 2017, +9% in 2018

- may see 4% GDP growth in Q2

2.) digital/mobile banking continues to grow rapidly

- BAC has been working their strategy for the past decade

- is THE leader in this space (I hope this is true)

3.) credit quality is best in class (we will see if this is true when we see the next recession)

- BAC wants to grow loans only to high FICO score consumers

- this is limiting overall loan growth to mid single digits

[rogermunibond]

BAC B warrants expire on 10/28

 

Anyone expecting a bump up in BAC share price as market maker hedges roll off or is the market already pricing in these warrants expiry OOTM?

[Viking]

It certainly has been an interesting year for US bank investors. BAC is trading today about where it was trading at the end of 2017. So essentially, the price of the bank stock has done nothing for the past 9 months.

 

We all understand that the stock market is a very accurate discounting and pricing mechanism. What has happened to cause the big banks to underperform so badly?

 

1.) US economic growth has done better in 2018 (than expected at the end of 2017). Projections for the remainder of 2018 look like they are being revised higher. Strong growth for the economy is very good for the banks.

2.) the Fed has raised rates 3 times and we will likely see a 4th in Dec. These increases are very good for banks NII. At the start of the year, it was expected we would see 3 increases from the Fed.

3.) the trend to more mobile usage continues. This is allowing the big banks to be very aggressive in cutting costs.

4.) as expected at the start of the year, tax reform has been an absolute boom to the big US banks. However, in Dec it was an expected benefit. As 2018 actualizes we are seeing the benefit show up in the reported results.

5.) capital return: CCAR results were announced in July and most of the big banks were approved to return close to 100% (some more) of earnings to shareholders in the form of buybacks and dividends.

6.) credit quality, given the strength of the economy, continues to be strong.

7.) large European banks continue to struggle (weak competitors).

 

As expected, bank earnings have exploded. BAC has been posting EPS growth this year of +35%, and it should earn around $2.54/share in 2018. With the shares trading at $29.60 it is trading at about a 11.65PE. In 2019 BAC is exdpected to earn about $2.90/share = 10.2PE.

 

Gundlach recently spent an hour discussing the leading economic indicators for the US and he is not seeing signs of recession looking 9-12 months out. Calculated Risk is optomistic about the near term economic outlook in the US. The one watch out is new home building; and the issue here is not overbuilding but significantly higher costs (due to lumber and other tarrifs) and Calculated Risk still expects a decent number of new homes built moving forward.

 

Bottom line, ‘the story’ for US bank stocks has continued to improve as 2018 has actualized. At some point Mr Market will connect the dots. Patience will be the key :-)

 

PS: the silver lining of a low is share price is, given the massive buybacks, the big banks are able to aquire more shares. Buffett talks about how, in this exact scenario a long term investor will hope for a low share price as it will allow more shares to be purchased and their ownership % to increase.

[dutchman]

im wondering if wells is the better buy right now. I think the worst is probably over by now. Trading at about a 10x '19 earnings.

[oddballstocks]

Viking,

 

I think the issue with the biggest banks is they can't grow due to market share limits in their biggest markets.  This means a few things:

 

1) The largest banks need to source growth from non-traditional banking streams

2) They are a bet on the nationwide economy as a whole

3) MOST IMPORTANT - The stocks are and should be viewed as more utility like.  Say we get a 3.5% growth, plus 2% inflation, so earnings should grow by 5.5% by the nature of just existing in the economy.  Layer in some leverage and expense reductions and 7% isn't unreasonable. There are also buybacks further juicing earnings growth. 

 

So from #3 say you have 7-8% earnings growth, maybe more from the above factors.  That's sustainable.  The stock pays a nice 2% dividend, and with buybacks has a reasonable yield.  For some of the largest companies in the US that's a nice investment picture, decent yield, decent growth.

[Viking]

Dutchman, my issue with WFC is management and the sales scandal; i am still not sure what to think. Looking forward, it des not look to me like they are a leader in digital. The stock certainly is cheap.

 

Oddball, i agree with your assessment. I now view the big US banks as stallwarts (they were a turnaround play). I think they can deliver 12-15% plus dividends for investors moving forward.

 

The big US banks looks more like the Canadian banks:

- oligopoly, with everyone making acceptable margins

- highly capitalized

- loan book high quality

 

The big difference is Canada’s housing bubble has not popped yet. The US economy looks much better positioned to do well moving forward.

 

[John Hjorth]

... PS: the silver lining of a low is share price is, given the massive buybacks, the big banks are able to aquire more shares. Buffett talks about how, in this exact scenario a long term investor will hope for a low share price as it will allow more shares to be purchased and their ownership % to increase.

 

Just a tiny elaboration here on what Viking is talking about, by an example provided Swedish_Compounder in a Berkshire topic, when share buybacks are taken to MaxQ under the right conditions - it's about the Danish P/C insurer TopDanmark A/S [TOP.CPH][i've had the pleasure of owning this "mediocre" Danish P/C insurer for some years now [ ; - ) ]:

 

... Under above assumptions, Berkshire could easily buy back 10% of the stock each year for ten years, if digging into their excess cash and trimming their equity holdings a bit. If assuming that the Berkshire stock goes up by 10% or so per year. That would lead to a reduction in share count by close to 66% and earnings would go up by 80%. Under these assumptions, earnings per share would go up by (1/0,9^10)*(1,06^10)= 414% increase or close to 18% annually compounded. We need to deduct some dividend income because of reduced equity holdings, but I still think we could see 16 - 17% compounded EPS growth.

 

This is of course just a though experiment, but one day I think something in that direction will happen and I think after running for some time it will fundamentally change the view of how the company is valued, partly because of the fact that implementation of such strategy would mean that the repurchase criteria can no longer be linked to P/B.

 

In fact, if there are enough shares for sale and the price of the stock does not go up too much, I think such a program could run for several decades and lead to market beating returns for a very long time. The Danish Insurance Company TopDanmark did this for 18 years and the result can be seen on the link below. Despite relatively poor development in profits, the share increased by 15,7% per annum for 18 years due to aggressive share buybacks.

 

https://valueandopportunity.com/2017/03/29/topdanmark-as-a-cannibal-soon-to-be-set-on-a-dividend-diet/

 

Material share buybacks can be a real booster [ref. MaxQ above!] to earnings per share under the right circumstances. I think those conditions actually exist right now for the Big Four US banks.

[Spekulatius]

You need cheap stocks for buybacks to work. The banks aren’t that cheap any more with a PE of ~11x. They arn‘t extremely  expensive either. I think low double digit return going forward are the most I would expect. in a recession , Banks could quickly trade close to tangible book value again, so that would be the downside scenario.

[RhubarbXIV]

You need cheap stocks for buybacks to work. The banks aren’t that cheap any more with a PE of ~11x. They arn‘t extremely  expensive either. I think low double digit return going forward are the most I would expect. in a recession , Banks could quickly trade close to tangible book value again, so that would be the downside scenario.

 

I'm pretty comfortable with a P/E of 11x or so. Growing at 7%. Compared to alternatives, I'm pretty content to own well-capitalized participants in the second-oldest profession. Double-digit returns seem pretty great when the rest of the market is probably indicating mid-single-digits or lower.

 

There's a great quote from Jamie Dimon's letter that addresses buybacks, and I think JPM's pricier than BAC given the higher ROE (forgive me if this has been posted before):

 

"While we prefer buying back our stock at

tangible book value, we think it makes sense to do so even at or above two times

tangible book value for reasons similar to those we’ve expressed in the past. If we

buy back a big block of stock this year, we would expect (using analyst earnings

estimates for the next five years) earnings per share in five years to be 2%—3%

higher and tangible book value to be virtually unchanged." -JD [emphasis mine]

 

Not like buying dented cans at your local value mart, but not destroying value either. JPM and BAC are also spending a ton on organic growth which is my preferred use anyhow (and their best option considering size and regulations). Incidentally, I think these investments by BAC will incrementally improve ROE to a more JPM-like level and allow them to earn possibly a higher valuation relative to TBV than is seen today.

 

Also don't forget where shares were relative to TBV in a, let's say, "pretty good" economy in Q1 2016. The banks don't need a recession to trade down, nor is it a guarantee a recession will trigger a sell-off. No two recessions are alike. Just because they're measured by declines in GDP or whatever the causes, have always been at least subtly different. Say interest rates rise, the yield curve does its convexity thing and pinches VCs, PE, etc., who pays the price then? Just a thought experiment.

 

I guess, in short, I'm with Viking.

 

I own BAC, JPM (formerly WT), and BRK- least original dude here, I know. Once I heard "leave the dance with the one who brung 'ya."

[Spekulatius]

I have not seen any recession where bank stocks didn’t see an substantial downturn anywhere at any time ever. Bank stocks tend to be high beta because their business is volatile. It may not be as volatile as it used to be, but it is still fairly volatile and leveraged.

 

Then, there is the issue that banks need to increase their equity by 10% when they increase their balance sheet and earnings power by 10%, unlike many tech stocks or even industrials that can grow with less capital nowadays. This makes them inherently less valuable and implies lower OR’s. This is similar to insurance companies, which I think I way cheaper at this point and which heavily own.

[RhubarbXIV]

I have not seen any recession where bank stocks didn’t see an substantial downturn anywhere at any time ever. Bank stocks tend to be high beta because their business is volatile. It may not be as volatile as it used to be, but it is still fairly volatile and leveraged.

 

Then, there is the issue that banks need to increase their equity by 10% when they increase their balance sheet and earnings power by 10%, unlike many tech stocks or even industrials that can grow with less capital nowadays. This makes them inherently less valuable and implies lower OR’s. This is similar to insurance companies, which I think I way cheaper at this point and which heavily own.

 

The recession before last, BAC traded up (2001). It's true that banks are sensitive to economic activity, but some types of economic activity more than others.

 

I'm not quite sure I understand using insurers to contrast with banks in leverage (this from a guy who is also quite long AIG-W). There are types of leverage of course, but insurers don't retain 100% of possible incremental claims on their books, either. And it's generally unwise for an insurer to grow revs/profits faster than claims-paying resources, which is in large part their TBV. In my experience, the safe lid in "normal" interest rate environments on ROEs is similar for the best banks and the best insurers (maybe mid-high teens). In addition, in the bulge bracket banks' investment banking, asset management, and trading desks provide a source of income (lumpy, though) that needs very little equity to run effectively. Often better than tech companies and certainly better than most industrials.

 

One contrast I would call against insurers is that it's incrementally easier to determine the quality of underwriting a bank is doing relative to an insurer. Remember Bob Benmosche of AIG's swagger and surliness with the media when all the while he was writing for revenue- in my due diligence I talked to a lot of P&C buyers and they said other sellers (like Hamilton) couldn't compete with AIG on pricing (v. bad, in retrospect- also don't read his book, it's not great). For BAC it was a little easier to look through just their own disclosure to figure out what was happening there.

 

In summary, I have no quibble with banks needing some incremental equity to grow their loan business, I agree returns are limited with the largest banks because acquisitions are effectively impossible. I own the world's least-surprisingly crappy insurer, AIG (for the right price, I believe, including the leverage in the warrants), and I probably wouldn't add massively to either banks or insurers unless they were marked down substantially (but they're big positions already and I'm about 30% cash).

 

Cum grano salis.

[John Hjorth]

With regard to risk related to investing in the Big Four US banks right now, I think there is a wide spread among investors actively participating in this discussion here on CoBF. Personally, I appreciate those inputs - actually all of them.

 

With regard to the logic & mathematical interaction - risk here partly omitted from the whole equation - between hurdle rates, ROE, holding periods & P/B at the time of buying a stock, I consider us all well covered by Joel's [racemize's] Essay: "Price and Returns". [it's exactly the same proposition for a company considering buying back its own stock, compared to alternatives.]

 

The CEOs & boards of those Big Four US banks all have an informational advantage to us with regard buyback decisions. Those banks have been forced to pour millions of USD into development of CCAR stress testing models, based on their own individual internal data per bank. I suppose those models are also activated for board buyback decisions, based on alternative scenarios going forward.

[Viking]

I think it is early to be thinking about recession in the US and applying a discount to the banks to reflect that. We may be years away from a recession. However, when we get a recession, yes, the big banks will sell off.

 

However, the banks are completely different animals than they were in 2008. Back then they were levered 30 to 1; today they are levered 10 to 1. The quality of the loans on their books are much, much better.

[John Hjorth]

It certainly has been an interesting year for US bank investors. BAC is trading today about where it was trading at the end of 2017. So essentially, the price of the bank stock has done nothing for the past 9 months. ...

 

As expected, bank earnings have exploded. BAC has been posting EPS growth this year of +35%,

 

Bottom line, ‘the story’ for US bank stocks has continued to improve as 2018 has actualized. At some point Mr Market will connect the dots. Patience will be the key :-)

 

PS: the silver lining of a low is share price is, given the massive buybacks, the big banks are able to aquire more shares. ...

 

Here I've edited [heavily, yes] Viking's post of September 28^th 2018 ... some fellow board members may argue "beyond recognition", and very biased ... actually, I to some extent tend to agree! .. Anyway, please try to look at the [highly edited, yes] quote. [What Viking then was posting can to me be considered facts.]

 

Personally, I think the Big US banks haven't [relatively] been cheaper [based on the investment thesis today - forward looking] than now for a long time.

 

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Naturally, the context here is BAC, but the common theme for the Big Four US Banks is similar [with individual differences].

 

- - - o 0 o - - -

 

Are we overlooking/missing/ignoring/skipping something material here?

[Dazel]

 

 

Made a killing here all!

Thanks for all your hard work.

 

Dazel

 

 

I have reentered BofA and Citi in big way....nice to be back....cash machines right now and loan quality has never been better. I thought it was dead money when I quoted in Jan...but I am happy to get this opportunity again...great businesses right now.

 

Dazel