BAC-WT - Bank of America Warrants

[gary17]

will big banks cut dividend when interest rates go to negative ??

thanks

[Spekulatius]

will big banks cut dividend when interest rates go to negative ??

thanks

 

I don’t think the dividends will be cut any time soon. The buybacks however are a different bucket and were bound to slow down anyways , because banks have reduced their capital buffer offer the last few years by distributing more than 100% of their earnings in many case to shareholders (WFC, BAC are examples of this). Buybacks are regarded much more discretionary and will cease silently and my cynical guess is that if bank stocks become really cheap (below tangible book) they will trickle to nothing because there is considerable uncertainty or because the management decided that they don’t work. :o

[meiroy]

will big banks cut dividend when interest rates go to negative ??

thanks

 

I don’t think the dividends will be cut any time soon. The buybacks however are a different bucket and were bound to slow down anyways , because banks have reduced their capital buffer offer the last few years by distributing more than 100% of their earnings in many case to shareholders (WFC, BAC are examples of this). Buybacks are regarded much more discretionary and will cease silently and my cynical guess is that if bank stocks become really cheap (below tangible book) they will trickle to nothing because there is considerable uncertainty or because the management decided that they don’t work. :o

 

Well, if dividends won't be cut, the dividends yield would increase compared to the lower rates and from this perspective banks would become more attractive, at some point.  How's my reasoning?

[redskin]

https://www.barrons.com/articles/bank-of-america-ceo-brian-moynihan-on-putting-employees-first-51585845197?mod=article_signInButton?mod=article_signInButton

 

BAC did $70 billion commercial loans in the month of March. 

[plato1976]

hopefully these will turn out to be good loans

 

https://www.barrons.com/articles/bank-of-america-ceo-brian-moynihan-on-putting-employees-first-51585845197?mod=article_signInButton?mod=article_signInButton

 

BAC did $70 billion commercial loans in the month of March.

[sleepydragon]

That the banks fell due to fears about dividend cuts is just another example of investors making a mistake.

If the bank doesn’t pay dividends, the money is not gone. It’s still there.

And US Banks can certain afford to pay dividends. But by not paying it they now have more capital to make more loans at the time of crisis. Isn’t this great for business?

 

 

[coc]

That the banks fell due to fears about dividend cuts is just another example of investors making a mistake.

If the bank doesn’t pay dividends, the money is not gone. It’s still there.

And US Banks can certain afford to pay dividends. But by not paying it they now have more capital to make more loans at the time of crisis. Isn’t this great for business?

 

The money isn’t really there if their NIM is 2% and losses run 5% of loans. That’s the fear.

[rb]

 

The money isn’t really there if their NIM is 2% and losses run 5% of loans. That’s the fear.

I think that scenario just won't happen. If losses run at 5% of loans, no chance you have 2% NIMs. NIMs will actually spike anyway, you go to 5% losses that'll be an NIM spike for the history books.

 

But I also don't think that we get to 5% loan losses. We'll have to go well above GFC levels. Here are loan losses:

 

https://fred.stlouisfed.org/series/USLSTL

 

GFC was also mostly household driven. Households look way, way better this time around:

 

https://fred.stlouisfed.org/series/HDTGPDUSQ163N

 

https://fred.stlouisfed.org/series/TDSP

 

The leverage basket case is in the business sector. But the business sector is much smaller than household. Moreover the crazy leverage is at the corporate level (bonds) not so much at the small business level (bank loans) cause your commercial bank doesn't let you push your leverage that much.

 

So because of all that I think that the banks are gonna be just fine. Now, if you were the guy financing buybacks for BBB- companies... this is really gonna suck.

[vinod1]

I just started stress testing banks one at a time, looking at their portfolios. I never really factored a scenario where there would be a nationwide stay at home policy. Still trying think this through.

 

I dont know how incentives would cause people to behave. Do people take advantage of this forbearance period to default on their loans? Would there be a nationwide one time exemption to any hit on people's credit ratings during this period?

 

Even if 25% of people do not make their loan payments for next 3 months and loan losses are only slightly elevated, one bank I am looking at would breakeven.

 

Modeling a 10% charge off rate on auto loans, 15% for credit cards and 5% for commercial loans for 2020, along with a 25% of people not making loan payments for 3 months, I get a hit of 25% to book value. I am assuming some cost cuts, marketing cuts, etc.

 

These numbers have no basis of course. Just thinking out loud on ways to stress test.

 

Vinod

 

[gary17]

Are Canadian banks not better

 

US banks are like a lighting rod for anything

[rb]

Well if you wanna stress banks then you look at the mortgage portfolios. You can basically play with credit cards, autos and all the other stuff all day long and a bank will be ok. There's generally simply not enough of it to get a bank into trouble. You want to get a mainline bank like BofA or Wells or USB or PNC in trouble. You need a large hit to the mortgage book.

 

Now of course all of these things are correlated. First goes the credit card, then goes the auto loan, then goes the mortgage. So the higher the charge off rate on cards and autos, the higher the mortgage charge off on mortgages as well.

 

My thesis (and reasonable minds may disagree) is this. Mortgage underwriting as been waaay more conservative post GFC than pre GFC. The book quality is much better. You may have noticed that the home ownership rate is significantly lower post-GFC. There are a number of reasons for that. But an important one is that you couldn't get a mortgage to buy a house. So someone that would have defaulted in GFC can't now because they don't have a mortgage to default on.

 

The housing market has been pretty good before this struck. So people have a good chunk of equity in their homes. Why would you default on a positive equity situation? So it remains to be seen what the housing market is gonna do. Right now it's frozen so you can't get any marks. But without the housing market taking a massive dive you're not gonna get even GFC levels of charge offs.

 

Finally, the banks hold a much smaller proportion of the mortgage pool than at any other point that i know of. The Fed is now a huge lender in the mortgage market. Now think from a portfolio quality perspective? What did they securitize and sell the Fed? Was it their best stuff or their crap?

[Spekulatius]

I just started stress testing banks one at a time, looking at their portfolios. I never really factored a scenario where there would be a nationwide stay at home policy. Still trying think this through.

 

I dont know how incentives would cause people to behave. Do people take advantage of this forbearance period to default on their loans? Would there be a nationwide one time exemption to any hit on people's credit ratings during this period?

 

Even if 25% of people do not make their loan payments for next 3 months and loan losses are only slightly elevated, one bank I am looking at would breakeven.

 

Modeling a 10% charge off rate on auto loans, 15% for credit cards and 5% for commercial loans for 2020, along with a 25% of people not making loan payments for 3 months, I get a hit of 25% to book value. I am assuming some cost cuts, marketing cuts, etc.

 

These numbers have no basis of course. Just thinking out loud on ways to stress test.

 

Vinod

 

There is a chance they we get European even Japan like zombie banks in the US. low NIM/ earnings power and assets that aren’t marked as defaulted, but aren’t paying either and just sit there on the balance sheet and fester. this whole loan forgiveness thing is OK, but I get a sense that it is  “Calvinball” time and default become a sport and in the end, banks will be the bag holder - because the buck stops somewhere.

 

Even if not, the low interest rate low NIM environment causes a semi permanent impairment that may justify the pounding these bank stocks have received.

[rb]

No they won't. They'll just sell the crap loans to the Fed. Fed's doing what 4 trillion in purchases? That's a lot of crap to sell to it.

[Rasputin]

I just started stress testing banks one at a time, looking at their portfolios. I never really factored a scenario where there would be a nationwide stay at home policy. Still trying think this through.

 

I dont know how incentives would cause people to behave. Do people take advantage of this forbearance period to default on their loans? Would there be a nationwide one time exemption to any hit on people's credit ratings during this period?

 

Even if 25% of people do not make their loan payments for next 3 months and loan losses are only slightly elevated, one bank I am looking at would breakeven.

 

Modeling a 10% charge off rate on auto loans, 15% for credit cards and 5% for commercial loans for 2020, along with a 25% of people not making loan payments for 3 months, I get a hit of 25% to book value. I am assuming some cost cuts, marketing cuts, etc.

 

These numbers have no basis of course. Just thinking out loud on ways to stress test.

 

Vinod

 

Hi Vinod,

 

Some things to consider:

 

1.  Regulatory guidance wrt Covid-19 related loan modification

 

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200322a1.pdf

 

2.  MBS prices have risen since year end so there should be positive OCI for BAC and WFC for Q1 2020

 

3.  I think most important input to CECL is their forecast on future unemployment rate and GDP growth/decline at 3/31/2020, so this could result in a huge provision charge for Q1 2020.  I don't know if they can assume that government paycheck protection program and other extraordinary measures will continue through the duration of stay-at-home order (the president signed the $2 Trillion package on 3/28/2020).

 

For now for BAC, I've estimated $39 B in NII (I used table 48, page 96 of the 10-K without offsetting higher rates they are getting from selling mbs to make new loans and volume of new loans) and $37 B in non NII (new loans should help with fees offset by reduction in investment banking income, interchange fees, etc)  along with $55 B in non interest expense (marketing and other cost cutting measures offset with bonus increases for front line workers, expenses incurred for workers from home, donations etc.).

 

I just use 100% of provisions shown in 2019 DFAST which was $48.3 B for BAC provision for credit losses in 2020.  I know current depression is much deeper than the lowest point in the stress test but the stress test covers 9 quarter of stress period with unemployment at 8.6% at the end of the 9 quarter stress period with no help from government response (such as the paycheck protection program) and banks changing their underwriting criteria etc.  2019 DFAST also assumed 25% in housing pricing index decline which has yet to happen.  I think while this covid-19 depression will result in much higher unemployment rate and much deeper gdp decline than the lowest point in the stress scenario, after 9 quarter (q2 2022) we will probably be back to 5-6% unemployment rate.  So I think this is a conservative estimate and we will likely see reserve releases in the future if they do indeed take $48.3 B in provision in Q1 2020. 

 

With that assumption, I get about $23.5 Billion in net losses to common shareholders, ignoring OCI, I estimate CET1 reduction of maybe $30 B including dividend payment between 12/31/2019 and 12/31/2020 for BAC.  I think BAC will easily make up this CET1 decline back in 2021-2022 especially with reserve releases as unemployment and gdp forecast get significantly better. 

 

While BAC is still trading at a slight premium to 12/31/2019 CET1, WFC is trading at $30 B discount to their 12/31/2019 CET1. 

 

I do hope this covid-19 depression will kill a bunch of fintechs, mortage servicers, other non bank competitors and the future hopefuls...die die die :)

 

Wrt Paycheck Protection Program

 

here is the SBA rule for lenders

 

https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL_0.pdf

 

" Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule...The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.  The Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is

necessary and appropriate in light of section 1106(h) of the Act, which prohibits the Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.  "

 

 

 

 

 

[coc]

I think that scenario just won't happen. If losses run at 5% of loans, no chance you have 2% NIMs. NIMs will actually spike anyway, you go to 5% losses that'll be an NIM spike for the history books.

 

But I also don't think that we get to 5% loan losses. We'll have to go well above GFC levels. Here are loan losses:

 

https://fred.stlouisfed.org/series/USLSTL

 

GFC was also mostly household driven. Households look way, way better this time around:

 

https://fred.stlouisfed.org/series/HDTGPDUSQ163N

 

https://fred.stlouisfed.org/series/TDSP

 

The leverage basket case is in the business sector. But the business sector is much smaller than household. Moreover the crazy leverage is at the corporate level (bonds) not so much at the small business level (bank loans) cause your commercial bank doesn't let you push your leverage that much.

 

So because of all that I think that the banks are gonna be just fine. Now, if you were the guy financing buybacks for BBB- companies... this is really gonna suck.

 

I agree with this type of analysis and have done it too, the problem is we don't know the depth of what we're about to face. Obviously we know the initial decline is going to be much, much sharper than the GFC. The ramifications of that are unknown. The household sector may look better but if 1/3 of small businesses in the country close, banks are going to have some serious C&I and CRE losses to come. The government is going after this but again...we don't know. I don't expect the pattern of losses to be anything like the GFC. You don't need crazy leverage to take you out if you have one quarter of -90% revenue, another quarter -50%, and then a third quarter -30%.

 

I'm not predicting that -- point is, hard to see right now.

[gary17]

all this is too complicated for my brain to figure out

bottom line. are we going to lose dividend... that's all i care.

 

 

[sleepydragon]

Banks are one of the few companies who have the cash to invest in this recession.

I would totally ok if banks suspend dividends and expand their loan book and thus future earnings

 

[vinod1]

Well if you wanna stress banks then you look at the mortgage portfolios. You can basically play with credit cards, autos and all the other stuff all day long and a bank will be ok. There's generally simply not enough of it to get a bank into trouble. You want to get a mainline bank like BofA or Wells or USB or PNC in trouble. You need a large hit to the mortgage book.

 

Now of course all of these things are correlated. First goes the credit card, then goes the auto loan, then goes the mortgage. So the higher the charge off rate on cards and autos, the higher the mortgage charge off on mortgages as well.

 

My thesis (and reasonable minds may disagree) is this. Mortgage underwriting as been waaay more conservative post GFC than pre GFC. The book quality is much better. You may have noticed that the home ownership rate is significantly lower post-GFC. There are a number of reasons for that. But an important one is that you couldn't get a mortgage to buy a house. So someone that would have defaulted in GFC can't now because they don't have a mortgage to default on.

 

The housing market has been pretty good before this struck. So people have a good chunk of equity in their homes. Why would you default on a positive equity situation? So it remains to be seen what the housing market is gonna do. Right now it's frozen so you can't get any marks. But without the housing market taking a massive dive you're not gonna get even GFC levels of charge offs.

 

Finally, the banks hold a much smaller proportion of the mortgage pool than at any other point that i know of. The Fed is now a huge lender in the mortgage market. Now think from a portfolio quality perspective? What did they securitize and sell the Fed? Was it their best stuff or their crap?

 

Agree completely. Do not really think mortgages are going to be a problem. That is the reason I did not even bring them up. Card, auto, commercial is where it is going to get interesting. How do you think about that?

 

Vinod

[vinod1]

I just started stress testing banks one at a time, looking at their portfolios. I never really factored a scenario where there would be a nationwide stay at home policy. Still trying think this through.

 

I dont know how incentives would cause people to behave. Do people take advantage of this forbearance period to default on their loans? Would there be a nationwide one time exemption to any hit on people's credit ratings during this period?

 

Even if 25% of people do not make their loan payments for next 3 months and loan losses are only slightly elevated, one bank I am looking at would breakeven.

 

Modeling a 10% charge off rate on auto loans, 15% for credit cards and 5% for commercial loans for 2020, along with a 25% of people not making loan payments for 3 months, I get a hit of 25% to book value. I am assuming some cost cuts, marketing cuts, etc.

 

These numbers have no basis of course. Just thinking out loud on ways to stress test.

 

Vinod

 

There is a chance they we get European even Japan like zombie banks in the US. low NIM/ earnings power and assets that aren’t marked as defaulted, but aren’t paying either and just sit there on the balance sheet and fester. this whole loan forgiveness thing is OK, but I get a sense that it is  “Calvinball” time and default become a sport and in the end, banks will be the bag holder - because the buck stops somewhere.

 

Even if not, the low interest rate low NIM environment causes a semi permanent impairment that may justify the pounding these bank stocks have received.

 

I have gone through more than 200 hours of financial commission interviews when I started investing in banks in 2012.

 

https://cybercemetery.unt.edu/archive/fcic/20110310171826/http://fcic.gov/resource/interviews

 

The sense that I got was nearly every one of the powers that be in the Fed or various regulatory agencies is acutely aware of what happened to Japanese banks. They bring it up again and again and again. It is frankly shocking to hear about how much they are willing to do to help the banks. In all of their memoirs they write about this. They have the tools and enough leeway to do that. Right or wrong, the view is as goes the banks so goes the economy.

 

That is the reason, I would invest in US banks and do not touch any non-US bank, ever. You need to be comfortable with the regulatory regime to be able to invest in banks and I think in US that is going to continue to be favorable, regardless of whoever is in power.

 

NIM is going to be impacted but not as much as many seem to be worried about for the big banks. In addition, I have a partiality to card portfolios which are pretty resilient to NIM compression, at least relatively.

 

That said, yes many banks took a hit to their IV and need to have their IV's revised down. I think it is much less than 40% though.

 

Vinod

[vinod1]

I just started stress testing banks one at a time, looking at their portfolios. I never really factored a scenario where there would be a nationwide stay at home policy. Still trying think this through.

 

I dont know how incentives would cause people to behave. Do people take advantage of this forbearance period to default on their loans? Would there be a nationwide one time exemption to any hit on people's credit ratings during this period?

 

Even if 25% of people do not make their loan payments for next 3 months and loan losses are only slightly elevated, one bank I am looking at would breakeven.

 

Modeling a 10% charge off rate on auto loans, 15% for credit cards and 5% for commercial loans for 2020, along with a 25% of people not making loan payments for 3 months, I get a hit of 25% to book value. I am assuming some cost cuts, marketing cuts, etc.

 

These numbers have no basis of course. Just thinking out loud on ways to stress test.

 

Vinod

 

Hi Vinod,

 

Some things to consider:

 

1.  Regulatory guidance wrt Covid-19 related loan modification

 

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200322a1.pdf

 

2.  MBS prices have risen since year end so there should be positive OCI for BAC and WFC for Q1 2020

 

3.  I think most important input to CECL is their forecast on future unemployment rate and GDP growth/decline at 3/31/2020, so this could result in a huge provision charge for Q1 2020.  I don't know if they can assume that government paycheck protection program and other extraordinary measures will continue through the duration of stay-at-home order (the president signed the $2 Trillion package on 3/28/2020).

 

For now for BAC, I've estimated $39 B in NII (I used table 48, page 96 of the 10-K without offsetting higher rates they are getting from selling mbs to make new loans and volume of new loans) and $37 B in non NII (new loans should help with fees offset by reduction in investment banking income, interchange fees, etc)  along with $55 B in non interest expense (marketing and other cost cutting measures offset with bonus increases for front line workers, expenses incurred for workers from home, donations etc.).

 

I just use 100% of provisions shown in 2019 DFAST which was $48.3 B for BAC provision for credit losses in 2020.  I know current depression is much deeper than the lowest point in the stress test but the stress test covers 9 quarter of stress period with unemployment at 8.6% at the end of the 9 quarter stress period with no help from government response (such as the paycheck protection program) and banks changing their underwriting criteria etc.  2019 DFAST also assumed 25% in housing pricing index decline which has yet to happen.  I think while this covid-19 depression will result in much higher unemployment rate and much deeper gdp decline than the lowest point in the stress scenario, after 9 quarter (q2 2022) we will probably be back to 5-6% unemployment rate.  So I think this is a conservative estimate and we will likely see reserve releases in the future if they do indeed take $48.3 B in provision in Q1 2020. 

 

With that assumption, I get about $23.5 Billion in net losses to common shareholders, ignoring OCI, I estimate CET1 reduction of maybe $30 B including dividend payment between 12/31/2019 and 12/31/2020 for BAC.  I think BAC will easily make up this CET1 decline back in 2021-2022 especially with reserve releases as unemployment and gdp forecast get significantly better. 

 

While BAC is still trading at a slight premium to 12/31/2019 CET1, WFC is trading at $30 B discount to their 12/31/2019 CET1. 

 

I do hope this covid-19 depression will kill a bunch of fintechs, mortage servicers, other non bank competitors and the future hopefuls...die die die :)

 

Wrt Paycheck Protection Program

 

here is the SBA rule for lenders

 

https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL_0.pdf

 

" Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule...The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.  The Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is

necessary and appropriate in light of section 1106(h) of the Act, which prohibits the Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.  "

 

Hi Rasputin,

 

Mucho thanks for the links and analysis for BAC.

 

I think your assumption of DFAST Severely Adverse Scenario is probably more likely and the right one.

 

To me it looks like the current scenario seems to be a little worse in some respects. The following is unlikely but going through a darker scenario like below:

 

1. Revenue also is going to drop quite significantly. When you do six month payment deferrals on 25% of your loans (conservative or extreme?), your net interest income goes down by 12.5%. No change to expenses though. 

 

2. I do not think we have much of an issue with mortgages. But Credit and Auto might take a bigger hit than projected. Default rates of 10% in 2008/9 in credit cards might be exceeded this time. Same with Auto. The issue is we might have a short term unemployment of 25%. What is the effect of this? Many of them would be getting payments from unemployment but what is the incentive to pay when you know banks are not going to put you in default? How many otherwise who can pay, start thinking, gee they screwed me in the past, it is only fair now to screw them back.

 

Those are some of the darker thoughts that I have for banks.

 

Thanks

 

Vinod

[rb]

Weirdly enough credit card loans are going down.

 

Feb 2020 - 850.6

Mar 4      - 859.3

Mar 11    - 859.1

Mar 18    - 857.5

Mar 25    - 845.9

[StubbleJumper]

Weirdly enough credit card loans are going down.

 

Feb 2020 - 850.6

Mar 4      - 859.3

Mar 11    - 859.1

Mar 18    - 857.5

Mar 25    - 845.9

 

 

Well, I don't know about your situation, but I can tell you that my credit card usage has become pretty light over the past weeks.  There's really nothing to buy.  I use it for groceries and my mobile phone, which amounts to bugger-all.  It's amazing what happens when you eliminate all the restaurant, gasoline, and travel expenditures.

 

 

SJ

[rb]

I agree. But it looks like for now Americans are using those savings to pay down their credit cards. Totally not what I was expecting. Not in line with 10% charge offs on credit card portfolios either. I know it's still the early innings and it can change rather abruptly. But it's encouraging for now at least.

[StubbleJumper]

I agree. But it looks like for now Americans are using those savings to pay down their credit cards. Totally not what I was expecting. Not in line with 10% charge offs on credit card portfolios either. I know it's still the early innings and it can change rather abruptly. But it's encouraging for now at least.

 

 

Well, I guess what I am trying to say is that I am probably one of those people who is "paying down" my credit card.  Maybe my maximum balance during the month of January was, say, $2,000.  Now my maximum balance in April might be $500 (it might not even get that high because there is nothing to buy).  Since I pay off my cards religiously every month, would I not be included as a contributor to the aggregate pay-down?  If there are many people like me out there who religiously pay the balance at the end of every month, that might explain your drawdown.  The people who routinely run a balance from month-to-month and pay interest are probably not the ones who are responsible for the aggregate effect that you see.

 

 

SJ

[thepupil]

 

Weirdly enough credit card loans are going down.

 

 

I imagine there’s lots of volatility and nuance beneath the surface. I “paid off” about $30K of credit card debt within the past month or two. Why? Two business trips to Asia and Europe were cancelled, leading to $25K or decrease in balance. Now I always pay I’m full with cash advances from employer so I don’t know if that counts, but with big spend categories going to zero for businesses and stuff, you could see credit card balance going down in aggregate but households in bad shape increasing in levverahe. I’d be watching the lower quality borrower issuer charge off / balances vs aggregate data