BAC-WT - Bank of America Warrants

[Ross812]

The formula does not take into account the reduction in strike price if dividends are raised above 1 cent. I'm not sure how much of a premium this should add though...

[anders]

Many thanks.. then the current price indicates a reduction in strike to around $6 to justify the price.. ? meaning approx $1 per year in dividend from jan 2012.. if they start increasing the dividend that is..

 

Thoughts?

[twacowfca]

The formula does not take into account the reduction in strike price if dividends are raised above 1 cent. I'm not sure how much of a premium this should add though...

 

The BS model accounts for regular dividends, zero in this case.  Therefore, the current BS model price is not out of line with the BS methodology.  The protection the warrants offer for some of the possible dilution from the payment of future dividends is a plus, but this feature is not enough to move the needle much for a company that needs to strengthen its balance sheet quite a bit before paying substantial dividends.

[ERICOPOLY]

There is probably a supply&demand component. 

 

Anybody can write a call, but not anyone can write a warrant.

 

So if the market is not pricing the warrants the way it would price an option, perhaps that's why?

[twacowfca]

There is probably a supply&demand component. 

 

Anybody can write a call, but not anyone can write a warrant.

 

So if the market is not pricing the warrants the way it would price an option, perhaps that's why?

 

This is a great opportunity to delta hedge if the HTB interest rate is not too high to short the warrants.  The prices of the two instruments should tend to rationalize once the recent high volatility regresses to the mean.  :)

[beerbaron]

I have got a few questions about BAC.

 

-US bank's problems are similar to Japan bank in the 90s. They are trying to rebuild their balance sheet. How long did it take for the big Japan banks to get to acceptable loan losses (1%) and Tier one to a decent size?

 

-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?

 

-I'm not done reading their Annual Reports but I can't help but notice their credit card business is bleeding money. Why are they still bleeding money... it's not like they could not cancel or reduce limits of their customers. I would hurt their business but subsidising their banking with their credit cards seems like a bad plan. Maybe that explain why they sold MBNA Canada to TD... BAC has no other business in Canada so it would not hurt their business.

 

Just some quick toughs.

 

BeerBaron

[jjsto]

"-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?"

 

I am not sure if this has been posted on here or not, but this is not a very pretty chart...

 

http://ftalphaville.ft.com/blog/2011/08/12/652026/are-us-banks-turning-japanese/

[ERICOPOLY]

"-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?"

 

I am not sure if this has been posted on here or not, but this is not a very pretty chart...

 

http://ftalphaville.ft.com/blog/2011/08/12/652026/are-us-banks-turning-japanese/

 

But read what he says in the analysis:

 

and US banks’ balance sheet problem is squarely a real estate one — non-real estate loan growth remains positive.

 

Now if you look at Citigroup, it doesn't really have that much USA real estate exposure relative to it's earnings power.  Other banks have more exposure.  I actually swapped some of my BAC for C today.  Initially I had swapped out of C for some tax losses, but a month has gone by now so I can swap back in.

[finetrader]

I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.

 

[Rabbitisrich]

Japanese banks also had some issues with provisioning and asset composition. We'll have to see whether U.S. real estate moderates but the Case-Shiller 20 city index has been flattish since '09 and commercial real-estated backed delinquencies are declining. The Moodys/REAL indices show moderation in office and apartments.

 

Here are a couple of papers with useful appendices:

 

www.nber.org/2004japanconf/hamao.pdf

 

www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf

 

 

The second link is a good review of Japan in the 90s from a banking perspective.

[Rabbitisrich]

I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.

 

The presentations and 10-Q from 2Q cover European CDS and asset exposure. You have to trust their netting arrangement. I think I read somewhere that most of their CDS written involve bilateral contracts, but I don't know if that implies some protection in the event of counterparty default.

[Cardboard]

I really like Citigroup here. Many were happy to hear Moynihan discussing about a smaller and more focused Bank of America. This kind of stuff has been going on at Citi for over 2 years now. The restructuring is much more advanced. I see no threat of dilution. Earnings should keep on improving and disappointments should become much less.

 

European exposure should be put into perspective. This bank has much better capital ratios (Tier 1, equity to assets, tangible equity, etc.) than most European banks and with its international presence (Asia, Latin America, the U.S.) should be much less exposed to Europe than European based banks. Derivatives could turn into a huge monster, but I think that the way Pandit has managed this bank and the amount of time that this European issue has been discussed that it would be quite surprising to see them go under because of some trade gone bad. They should not be first in the domino sequence if it happens.

 

It is the second time I enter C. Last time was a profitable "trade", but this time I think it will be much better. It was around $40 (adjusted for the reverse split), now it is at $27. Same company, just better now and cheaper.

 

Cardboard

 

 

 

 

[ERICOPOLY]

CitiHoldings is getting small enough now where the loan growth in Citicorp over then next 12 months should overshadow the portfolio runoff of Citiholdings.

 

The headlines can read more like "Wow, a TBTF US bank with loan growth".  The past 12 months the headlines kept talking about declining loan growth at Citigroup, even though Citicorp total loans grew 16% YOY.

 

 

 

[ERICOPOLY]

I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.

 

From page 32 of the 7/21/11 presentation linked here: 

http://www.citigroup.com/citi/fin/index.htm

 

 

 

Citigroup – Net Exposure to GIIPS

 As of June 30, 2011, Citi’s net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and corporations domiciled in these countries, totaled $13B based on our internal risk management measures

 Of the $13B in existing net exposure: – About $2B is in assets held in trading portfolios and Available-for-Sale portfolios, which are marked-to-

market daily; trading portfolio exposure levels vary as we maintain inventory consistent with our customer

needs – The remaining $11B is net credit exposure, mostly in the form of funded loans comprised of:

 a little more than $1B to sovereigns;  approximately $6B to financial institutions of which 70% represents parent guaranteed short-term, off-shore

placements with these financial institutions’ non-GIIPS subsidiaries or fully collateralized by high quality,

primarily non-GIIPS collateral;  and approximately $4B to corporates of which 2/3rds is to multi-national corporations domiciled in the GIIPS

 We also have $9B unfunded exposure, primarily to multinational corporations headquartered in these countries. Like other banks, we also provide settlement and clearing facilities for a variety of clients in these countries, and are actively monitoring and managing these intra-day exposures

 Citi also has additional, locally-funded exposure in these countries to retail customers and small businesses, as part of our local lending activities. The vast majority of this is in Citi Holdings (Spain and Greece) and has been previously disclosed

 The sovereign entities of Greece, Ireland, Italy, Portugal and Spain, as well as the financial institutions and corporations domiciled in these countries, are an important part of the global Citi franchise. We fully expect to maintain our long-standing relationships with these entities going forward, and to continue to maintain a presence in these markets to service all of our global customers

 

[Kiltacular]

I'm not done reading their Annual Reports but I can't help but notice their credit card business is bleeding money. Why are they still bleeding money... it's not like they could not cancel or reduce limits of their customers. I would hurt their business but subsidising their banking with their credit cards seems like a bad plan. Maybe that explain why they sold MBNA Canada to TD... BAC has no other business in Canada so it would not hurt their business.

 

BeerBaron,

 

Perhaps I'm misreading things, but the card business appears to be doing well in 2011.  In the 2nd quarter 10Q, net income from Global Card Services is: $3.77 billion in the first six months versus $1.794 billion for the first six months of 2010.

 

It actually appears to be their most profitable segment currently. 

 

I'm looking at table 3, segment results on page 11 of the Q. 

 

The related notes:

Global Card Services net income increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year due primarily to a decrease in the provision for credit losses. Revenue decreased as a result of a decline in net interest income from lower average loans and yields as well as lower noninterest income. Provision for credit losses decreased reflecting improving economic conditions and continued expectations of improving delinquency, collection and bankruptcy trends.

 

On a related matter, BoA also has massive non-interest income that shouldn't necessarily be crushed by a poor interest rate environment.  Using the numbers for 2010 (without the 2011 subtractions for huge increase in reps. & warranties in 2011), shows that they had over $34 billion in non-interest income -- well over 50% of their non-interest plus interest income.

 

Am i looking at something different than everyone else? 

 

[vinod1]

 

Now if you look at Citigroup, it doesn't really have that much USA real estate exposure relative to it's earnings power.  Other banks have more exposure.  I actually swapped some of my BAC for C today.  Initially I had swapped out of C for some tax losses, but a month has gone by now so I can swap back in.

 

Eric

 

Do you invest directly in stock or did you buy options? I have bought 2013 35 calls.

 

Vinod

[ERICOPOLY]

This time I just bought the stock.  I had the calls originally and got out of them for a tax loss on the way down as volatility spiked.  Now I'm back in at $27.  I gained about 20% IV out of this trade (compared to my original position before the crash).

 

 

[vinod1]

I gained about 20% IV out of this trade (compared to my original position before the crash).

 

:) How did you do that?

[ERICOPOLY]

I gained about 20% IV out of this trade (compared to my original position before the crash).

 

:) How did you do that?

 

I owned the deep-in-the-money $2.50 strike calls.  When the stock was at $4.50, there was hardly any volatility premium compared to when I traded out of them.  The rising volatility premium softened the fall.  The stock is a bit cheaper too, but that's luck.

 

 

[txlaw]

Article you fellows might want to read about BAC:

 

http://www.bloomberg.com/news/2011-09-16/bofa-said-to-keep-bankruptcy-as-option-for-countrywide-unit.html

 

So do skeptics still think BAC is a zero?

 

I love how Branch Hill Capital is quoted everywhere in the media when it comes to BAC litigation.  Also think it's hilarious the extent to which ZH is pushing for an MBIA settlement.

 

http://www.zerohedge.com/news/bank-america-implodes-mbia-volkwsagen-short-squeeze-candidate

 

Disclosure: Long BAC and MBI

[lessthaniv]

The summary legal opinion is worth the read. Page 37

 

http://www.cwrmbssettlement.com/docs/Opinion%20Regarding%20Corporate%20Separateness.pdf

 

Long BAC,

 

<IV

[BargainValueHunter]

It is particularly hilarious how ZH, which has been bashing Berkowitz on the way down, goes out of its way to not name him as an obvious squeeze beneficiary (aka "smart guy") in the article.

Article you fellows might want to read about BAC:

 

http://www.bloomberg.com/news/2011-09-16/bofa-said-to-keep-bankruptcy-as-option-for-countrywide-unit.html

 

So do skeptics still think BAC is a zero?

 

I love how Branch Hill Capital is quoted everywhere in the media when it comes to BAC litigation.  Also think it's hilarious the extent to which ZH is pushing for an MBIA settlement.

 

http://www.zerohedge.com/news/bank-america-implodes-mbia-volkwsagen-short-squeeze-candidate

 

Disclosure: Long BAC and MBI

[ERICOPOLY]

Surprising how closely the declines of C and BAC have tracked one another:

 

http://moneycentral.msn.com/investor/charts/chartdl.aspx?PT=6&showchartbt=Redraw+chart&compsyms=c&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&CF=0&D7=&D6=&symbol=BAC&nocookie=1&SZ=0

 

Is BAC really down because of the lawsuit headlines?  Okay, then, maybe so -- but why is Citi down by almost as much?  It looks like the market is punishing BAC barely more than it is punishing C (which doesn't have any scary headlines).

 

So perhaps Mr. Market isn't really buying into all the headline hype around BAC. 

 

 

[txlaw]

I really like Citigroup here. Many were happy to hear Moynihan discussing about a smaller and more focused Bank of America. This kind of stuff has been going on at Citi for over 2 years now. The restructuring is much more advanced. I see no threat of dilution. Earnings should keep on improving and disappointments should become much less.

 

European exposure should be put into perspective. This bank has much better capital ratios (Tier 1, equity to assets, tangible equity, etc.) than most European banks and with its international presence (Asia, Latin America, the U.S.) should be much less exposed to Europe than European based banks. Derivatives could turn into a huge monster, but I think that the way Pandit has managed this bank and the amount of time that this European issue has been discussed that it would be quite surprising to see them go under because of some trade gone bad. They should not be first in the domino sequence if it happens.

 

It is the second time I enter C. Last time was a profitable "trade", but this time I think it will be much better. It was around $40 (adjusted for the reverse split), now it is at $27. Same company, just better now and cheaper.

 

Cardboard

 

The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

 

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause. 

[sswan11]

Not that I agree but the market I think is worried about Citi's European assets.