BAC-WT - Bank of America Warrants

[LearningMachine]

I've been combing through annual reports of big banks to understand likelihood of losses taking them under CET1 regulatory capital.

 

For Bank of America, has anyone been able to understand what they are hiding under "Other Assets" in their 2019 Annual report?

 

On pages 9 and 51, "Other Assets" is $339 Billion of the total $2.4 Trillion in assets.  That is huge.  For context, their Tier 1 equity capital currently at 10.7% is only $166.67 Billion. Even if it could absorb losses in commercial real estate, mortgage-backed securities, construction loans, loans to small businesses & energy, any additional losses in "Other Assets" could take them under regulatory capital.

 

On page 46, "All Other Assets" is $321.89 Billion.  On page 111, they break out Goodwill of 68.95 Billion and Customer Receivables of $55.94 Billion, bringing "Other Assets" to $129.69 Billion.

 

Their loan portfolio with percent in commercial real estate and FICO scores looks better than other banks, but they are hiding more in "Other Assets" than other banks. Can anyone help me figure out what it is they are hiding?  What part of this is investments in other stocks?  Holding stocks requires higher regulatory capital.

 

[fareastwarriors]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm

 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

 

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

 

Fed puts restrictions on bank dividends after test finds some banks could be stressed in pandemic

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

 

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year.  The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

 

Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year.

[StubbleJumper]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm

 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

 

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

 

Fed puts restrictions on bank dividends after test finds some banks could be stressed in pandemic

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

 

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year.  The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

 

Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year.

 

 

It strikes me as a decision that lacks courage.  If the Fed were truly worried, it should have just ordered all TBTF banks to suspend all dividends and buybacks for the next 12 months.  Instead, they have taken this strange half-measure where dividends are permitted, but the TBTF banks now have to submit a second capital plan.  What's that going to cost?  The CCAR is already a very expensive process for the banks.  Just suspend all dividends if that's what's making the fed nervous.

 

 

 

SJ

[tng]

Capping dividends at the current level isn't surprising at all. Some banks like WFC had very high payout ratios already (they were limited from doing buybacks so they paid a very big percentage of their earnings). I suspected most banks would voluntarily suspend buybacks anyways even if the Fed didn't force them to because buybacks have become a bit of a political issue now and it is bad optics to be buying back stock when the economy is shut down.

[Parsad]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm

 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

 

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

 

Fed puts restrictions on bank dividends after test finds some banks could be stressed in pandemic

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

 

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year.  The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

 

Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year.

 

Overall, I think the Fed did the right thing.  It ensures that Banks aren't returning more capital than income, while taking the onus off of the banks and putting it on the Fed as the responsible party. 

 

I just read the whole thing, and I'm pleasantly pleased that banks overall in the U.S. are strong going into this crisis and should come out well at the end of it.  Without liquidity, access to capital and a strong banking system, this would have been like 1929.  Instead, the government stick-handled its way through the crisis, with plenty of bumps yet to come.  I think a "W" recovery with the 2nd half of the "W" being less severe than the first is now the most likely outcome. 

 

That being said, the amount of debt piling on to all government balance sheets is scary!  Cheers!

[LC]

Agree, Sanjeev.

 

Forecast results are difficult. PPNR for example is largely qualitatively estimated. While FRB had access to current data to perform their analysis, caution is needed when interpretation the results. The point is, while they are exhibiting cautious optimism, they could very well be wrong. The static dividend and tying payouts to earnings is prudent behavior.

 

While the debt is concerning I think it was partially politically driven. Otherwise I have been continuously impressed by FRB for the past few years.

 

Another important note is that these estimates are preliminary from FRB. Banks are performing their own analysis on Q1/Q2 data as we speak - these will be more accurate than FRB's sensitivity testing.

[SHDL]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm

 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

 

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

 

Fed puts restrictions on bank dividends after test finds some banks could be stressed in pandemic

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

 

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year.  The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

 

Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year.

 

 

It strikes me as a decision that lacks courage.  If the Fed were truly worried, it should have just ordered all TBTF banks to suspend all dividends and buybacks for the next 12 months.  Instead, they have taken this strange half-measure where dividends are permitted, but the TBTF banks now have to submit a second capital plan.  What's that going to cost?  The CCAR is already a very expensive process for the banks.  Just suspend all dividends if that's what's making the fed nervous.

 

 

 

SJ

 

They probably did this because they wanted to avoid scaring Mr Market unnecessarily but also wanted to keep the option to quickly reverse course if things actually start going badly. Not a terrible compromise given the circumstances IMO.

[meiroy]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm

 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

 

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

 

Fed puts restrictions on bank dividends after test finds some banks could be stressed in pandemic

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

 

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year.  The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

 

Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year.

 

 

It strikes me as a decision that lacks courage.  If the Fed were truly worried, it should have just ordered all TBTF banks to suspend all dividends and buybacks for the next 12 months.  Instead, they have taken this strange half-measure where dividends are permitted, but the TBTF banks now have to submit a second capital plan.  What's that going to cost?  The CCAR is already a very expensive process for the banks.  Just suspend all dividends if that's what's making the fed nervous.

 

 

 

SJ

 

They probably did this because they wanted to avoid scaring Mr Market unnecessarily but also wanted to keep the option to quickly reverse course if things actually start going badly. Not a terrible compromise given the circumstances IMO.

 

Makes sense.  Add to the Tasseography, the statement about the Volker Rule, the Fed will support banks' earnings in various ways with the object of banks making loans?

 

https://www.fdic.gov/news/speeches/spjun2520a.html

 

"To facilitate capital formation, the rule would enable banking entities to provide credit through fund investments that would increase the availability of capital for businesses across the country. For example, banking entities would be permitted to invest in qualifying venture capital funds and credit funds, subject to important safeguards. In addition, the rule would improve several existing exclusions from the covered fund definition to provide clarity and simplify compliance."

 

[Junto]

Really struggling on this closing price at $23.25.  The Q1 Book Value was $27.84. Fed severely adverse scenario stress tests show potential losses $25.6 billion through Q1 2022. Shares outstanding as of Q1 2020 $8.68 billion.  $2.97 per share loss to book.  Brings you to $24.87 per share value on a downside scenario. We are sitting at below this right now and it is unlikely that the losses will reach the levels of the "severely adverse scenario"

 

The lack of the ability to repurchase shares is detrimental in the near term as the discount would be a great time to accumulate so best to use a dividend reinvestment program. Looks like earnings consensus is $0.31/share for Q2.  I would not be surprised if they easily beat earnings estimates this quarter. 

 

 

[Spekulatius]

Really struggling on this closing price at $23.25.  The Q1 Book Value was $27.84. Fed severely adverse scenario stress tests show potential losses $25.6 billion through Q1 2022. Shares outstanding as of Q1 2020 $8.68 billion.  $2.97 per share loss to book.  Brings you to $24.87 per share value on a downside scenario. We are sitting at below this right now and it is unlikely that the losses will reach the levels of the "severely adverse scenario"

 

The lack of the ability to repurchase shares is detrimental in the near term as the discount would be a great time to accumulate so best to use a dividend reinvestment program. Looks like earnings consensus is $0.31/share for Q2.  I would not be surprised if they easily beat earnings estimates this quarter.

 

All bank stocks have been weak. BAC is no exception. Their tangible book ( the more relevant number to compare different banks imo) is $19.79/ share , so it trades at a small premium to tangible assets still.

[Junto]

Really struggling on this closing price at $23.25.  The Q1 Book Value was $27.84. Fed severely adverse scenario stress tests show potential losses $25.6 billion through Q1 2022. Shares outstanding as of Q1 2020 $8.68 billion.  $2.97 per share loss to book.  Brings you to $24.87 per share value on a downside scenario. We are sitting at below this right now and it is unlikely that the losses will reach the levels of the "severely adverse scenario"

 

The lack of the ability to repurchase shares is detrimental in the near term as the discount would be a great time to accumulate so best to use a dividend reinvestment program. Looks like earnings consensus is $0.31/share for Q2.  I would not be surprised if they easily beat earnings estimates this quarter.

 

All bank stocks have been weak. BAC is no exception. Their tangible book ( the more relevant number to compare different banks imo) is $19.79/ share , so it trades at a small premium to tangible assets still.

 

Agreed. Tangible book is the primary proxy in comparison to other banks but I think when reviewing the performance of one bank, you should look at book value and understanding the risk that the book value would be impaired.

 

 

[OracleofCarolina]

Nice to see more purchases

[marazul]

do you guys know if he keeps buying, are additional filings required? Without knowing much about the regulation I would have thought yes, but have not seen a filing since the original one 2 days ago.

[marazul]

do you guys know if he keeps buying, are additional filings required? Without knowing much about the regulation I would have thought yes, but have not seen a filing since the original one 2 days ago.

[valueinvesting101]

A Form 4 must be filed before the end of the second business day following a change in ownership of securities or derivative securities (including the exercise or grant of stock options) for individuals.

 

https://en.wikipedia.org/wiki/Form_4

[gfp]

Right - a form 4 must be filed for buys or sells within a few days because Berkshire is a 10% owner.

[RadMan24]

Really struggling on this closing price at $23.25.  The Q1 Book Value was $27.84. Fed severely adverse scenario stress tests show potential losses $25.6 billion through Q1 2022. Shares outstanding as of Q1 2020 $8.68 billion.  $2.97 per share loss to book.  Brings you to $24.87 per share value on a downside scenario. We are sitting at below this right now and it is unlikely that the losses will reach the levels of the "severely adverse scenario"

 

The lack of the ability to repurchase shares is detrimental in the near term as the discount would be a great time to accumulate so best to use a dividend reinvestment program. Looks like earnings consensus is $0.31/share for Q2.  I would not be surprised if they easily beat earnings estimates this quarter.

 

All bank stocks have been weak. BAC is no exception. Their tangible book ( the more relevant number to compare different banks imo) is $19.79/ share , so it trades at a small premium to tangible assets still.

 

Big banks don't need to raise capital, so the prices of the stock have no impact on the business, so whether stock prices have been weak or strong have no relevance.

 

With regards to BAC's book value, or tangible book, one has to consider how profitable BAC was, and still is pre-reserve building, which gives you a sense of how strong the business is despite current conditions. The stimulus by the government has put off a mass exodus of negative events, and it looks as if stimulus at a smaller scale will continue for a little bit longer. The long term effects is unknown. But what is known, is BAC is a pretty solid operation, executing exceptionally well, and has manages its relationships with customers well.

 

BAC today is about 10x pre-reserve earnings. Longer term, if BAC survives and makes money during this crisis, knowing whose in charge and how the loan book performed, would you think investors would be willing to pay 1x, 2x, or 3x tangible book for this business? Currently, you get it for 1.2x or so. The upside appears must greater than the downside, particularly when the market looks to invest in other things besides tech and pipe dream auto makers.

 

5+ years, BAC could be 2 or 3 times tangible book with a reasonable dividend. Corporate tax rates would impact growth in earnings about one year, but overall, I like the opportunity.

 

 

 

 

 

 

[bennycx]

Buffett added some more

[fareastwarriors]

Buffett added some more

 

 

Nice.

[sleepydragon]

Buffett added some more

 

 

Nice.

 

 

2 more million shares it will be a billion shares.

Maybe that’s what he has in mind. A nice round number!

 

[redskin]

Looks like he is getting serious...

[erdospi]

He kept buying WFC prior to the banking crisis, bought the Irish banks, IBM, etc. gees made his fair share of mistakes.

 

He has an incredible track record but everyone here is smart enough to not rely on his purchases, just a false sense of confidence.

[RadMan24]

He kept buying WFC prior to the banking crisis, bought the Irish banks, IBM, etc. gees made his fair share of mistakes.

 

He has an incredible track record but everyone here is smart enough to not rely on his purchases, just a false sense of confidence.

 

What's your point exactly? When Buffett bought BofA when it was trading at a fraction of its current price, he said he sees it being another American Express or Coca-Cola type investment. And that's what its been, and now he is buying a little more now. No one on this thread is oblivious to that fact.

 

He said Apple was like the third business of Berkshire when he made his initial investment. Look at that investment now.

 

When Buffett makes statements like these, its hardly a poor move to dive deeper in said company.

 

Find me a similar statement he said about IBM, Irish banks, or even WFC. 

[erdospi]

He kept buying WFC prior to the banking crisis, bought the Irish banks, IBM, etc. gees made his fair share of mistakes.

 

He has an incredible track record but everyone here is smart enough to not rely on his purchases, just a false sense of confidence.

 

What's your point exactly? When Buffett bought BofA when it was trading at a fraction of its current price, he said he sees it being another American Express or Coca-Cola type investment. And that's what its been, and now he is buying a little more now. No one on this thread is oblivious to that fact.

 

He said Apple was like the third business of Berkshire when he made his initial investment. Look at that investment now.

 

When Buffett makes statements like these, its hardly a poor move to dive deeper in said company.

 

Find me a similar statement he said about IBM, Irish banks, or even WFC.

 

I missed that one when did he compare BAC to another KO or AXP type investment?

[RadMan24]

He kept buying WFC prior to the banking crisis, bought the Irish banks, IBM, etc. gees made his fair share of mistakes.

 

He has an incredible track record but everyone here is smart enough to not rely on his purchases, just a false sense of confidence.

 

What's your point exactly? When Buffett bought BofA when it was trading at a fraction of its current price, he said he sees it being another American Express or Coca-Cola type investment. And that's what its been, and now he is buying a little more now. No one on this thread is oblivious to that fact.

 

He said Apple was like the third business of Berkshire when he made his initial investment. Look at that investment now.

 

When Buffett makes statements like these, its hardly a poor move to dive deeper in said company.

 

Find me a similar statement he said about IBM, Irish banks, or even WFC.

 

I missed that one when did he compare BAC to another KO or AXP type investment?

 

Video ain't working on CNBC, but here's the article referencing the quote at bottom: https://www.cnbc.com/id/44271446

Why now? Buffett tells Becky that BofA’s shares “have gone down a lot” and the bank is “certain to be around” for a long time.

 

He says Wells Fargo , a large Berkshire holding, and BofA have the best deposit franchises in the country, and compares today’s investment to Berkshire’s past deals for GEICO and American Express .

 

edit: You'll have to forgive me on missing a few details, Geico instead of KO - but nonetheless, he's usually dead on when it comes to financial companies.