BAC-WT - Bank of America Warrants

[Cardboard]

I think it is unwise to under-estimate the market. It is only in very few instances that value investors will be able to sniff out true bargains. Here I am talking about doubles and triples happening in short order or a real gap between the stock price and value. How many times have you bought a stock at prices you thought were unreal, only to find out a few weeks, months after that the story was in worst shape than you imagined? David Einhorn talks about it in "Fooling some of the people all of the time" that you can't assume that the person on the other side of the trade is unsophisticated.

 

In the case of BAC or even AIG, the problem is the lack of adequate return on equity and EPS. They have made progress, but both are nowhere near delivering earnings power that would allow for their stock prices to reach the valuations that many of you imply. Then at BAC you have one time "hits" of one sort or another arising every month or so. Libor is the latest. How many more cockroaches is there? Then how long will this deflation era lasts? This means low demand or few qualifiers for quality loans and a low interest environment which hurts their return on assets. I certainly cannot pretend to be more qualified than Mr. Market to assess the length and severity of it.

 

At least AIG can buy back a ton of shares and really increase the size of your pie while BAC seems stuck waiting for a true economic recovery. Cutting costs and cleaning up the legacy mess seems to be the best avenue to control a little more their destiny. I think that is why the market is not buying it and pricing it according to what it can earn today or $1 or so. Then you have competition for your money in the form of JPM, C, WFC and others. While I own BAC currently, I am not impressed by its earnings power or rate of turnaround. I can still see $20 or $30 out, but it could be a very long time into the future. If it takes a decade to reach $20, you are talking 10.9% a year. It does not seem that appealing compared to other alternatives.

 

So yes, it seems that the odds are more in our favour than not to get there more quickly than what Mr. Market perceives, but there is no guarantee either. While at around $5 there was true panic selling, it seems now that Mr. Market is trying better to assess if it is worth holding or not.

 

Cardboard 

[MrB]

I think it is unwise to under-estimate the market. It is only in very few instances that value investors will be able to sniff out true bargains. Here I am talking about doubles and triples happening in short order or a real gap between the stock price and value. How many times have you bought a stock at prices you thought were unreal, only to find out a few weeks, months after that the story was in worst shape than you imagined? David Einhorn talks about it in "Fooling some of the people all of the time" that you can't assume that the person on the other side of the trade is unsophisticated.

 

In the case of BAC or even AIG, the problem is the lack of adequate return on equity and EPS. They have made progress, but both are nowhere near delivering earnings power that would allow for their stock prices to reach the valuations that many of you imply. Then at BAC you have one time "hits" of one sort or another arising every month or so. Libor is the latest. How many more cockroaches is there? Then how long will this deflation era lasts? This means low demand or few qualifiers for quality loans and a low interest environment which hurts their return on assets. I certainly cannot pretend to be more qualified than Mr. Market to assess the length and severity of it.

 

At least AIG can buy back a ton of shares and really increase the size of your pie while BAC seems stuck waiting for a true economic recovery. Cutting costs and cleaning up the legacy mess seems to be the best avenue to control a little more their destiny. I think that is why the market is not buying it and pricing it according to what it can earn today or $1 or so. Then you have competition for your money in the form of JPM, C, WFC and others. While I own BAC currently, I am not impressed by its earnings power or rate of turnaround. I can still see $20 or $30 out, but it could be a very long time into the future. If it takes a decade to reach $20, you are talking 10.9% a year. It does not seem that appealing compared to other alternatives.

 

So yes, it seems that the odds are more in our favour than not to get there more quickly than what Mr. Market perceives, but there is no guarantee either. While at around $5 there was true panic selling, it seems now that Mr. Market is trying better to assess if it is worth holding or not.

 

Cardboard

 

You make some good points, but at least for me I don't care about what the market thinks or whoever it is I am buying from. It is irrelevant. All that counts is whether things shape up the way I expected it to be..more or less...and whether I priced it correctly. In the case of BAC and AIG, my money says those companies are misspriced. Whether BAC goes to $10 or $1 in the meantime is also not important, my outcome will be determined by the value of the cash generated mainly in the next 5 or so years. Even if I am pricing 80cents at $1 I am still better off when it is being bought back at 50cents which is happening at AIG and could very well start to happen at BAC within the next year or two.

 

Both these companies are once in a lifetime opportunities; the kind of investments that can last into the next generation. No guarantees, but dang I'm been paid very well to take on the risk of owning these two world class franchises, all current issues considered. 5 years from now I expect to either feel very smug or lick my wounds without having had my clock cleaned.

 

Lastly, that 10% return you are talking about could very well be envied by more than 99% of professional fund managers over the next decade, because deflation is something that will very likely happen, until they print it to death.

 

 

 

So, as I said good points and my comments are intended to add to the conversation, not necessarily disputing what you are saying. 

[ERICOPOLY]

Cutting costs and cleaning up the legacy mess seems to be the best avenue to control a little more their destiny. I think that is why the market is not buying it and pricing it according to what it can earn today or $1 or so.

 

They expect to realize about $1.18 per share in additional pre-tax expense reduction over the next 2.5 years.  $6b from LAS and $7b from NewBAC.

 

The stock is presently priced at a 12% earnings yield to those expense savings on an after-tax basis.  And it's priced at a 14% yield to the current $1 earnings expectation.  So it's a 26% yield to the combination.  Personally I think the stock will do well in the next few years for this reason.

 

 

[xazp]

Thank you very much, that makes me feel great. 

 

So I presented BAC at a value conference, and I'd say 3 of 30 professional investors there had given it more than a glance post-crisis.  Most comments were along the lines of "ballsy topic!"  The way I interpret those comments are that BAC is just "a huge, risky mess" and they're not going to spend time examining it.  To me, every R&W, LIBOR, DOJ, foreclosure, etc headline just reinforces that view.  I mean, Buffett made a large investment and has been pumping it ever since, and even now professional value investors won't take a look? 

 

There is a strong anti-financial company narrative today (with good reason, I might add).  They did a lot of really shitty and stupid things in 2003-2008.  I think the financial crisis was so searing to people, that the narrative continues today.  But, the companies themselves - both through regulation and management changes - really are trying to clean up their act.  It's taking a lot of time, and a lot of money, and we have a ways to go. 

 

My view is that most people won't touch this (and other financial stocks) due to this strong negative narrative, the headlines, and that it will take years more to resolve the mess from the financial crisis.  As for me, I see the light at the end of the tunnel:  disciplined underwriting, housing bottoming, good credit quality, and costs coming down.  And the holy grail for me, stock buybacks.  Given their price & capital ratios and capital generation, I see this as a meaningful contributor to BAC's long-term value (I don't see why you'd expend capital to issue a 4% mortgage when you can buy your own assets back at 1/3 of book value).  Finger's crossed it happens next year. 

 

 

 

 

 

 

 

 

 

 

XZAP - your analysis is phenomenal...in less than 10 posts I've already learned a ton from your work. My only question is this - do you think the marketplace is naïve enough to take these blatantly absurd litigation numbers (such as the $100B number you cited - something ZeroHedge likes to throw around as well) seriously? While your analysis is compelling, it is not so complex to inhibit the billions of dollars managed by extremely smart, value-oriented investors from driving up the stock price - in other words, why is BAC not at the top of every single hard-core value investor's portfolio? Not once was it discussed at the Sohn Conference, for example.

 

Curious what your thoughts are.

 

Edit: I wasn't clear enough what my question was/is.....basically I am wondering if there is something going on that we're not seeing. The story is just so obvious to me and there are untold numbers of value-investor eyes on the name - what are we missing? Is it merely a time arbitrage story where the market is not going to pay up for something until the free cash actually starts flowing?

[xazp]

They expect to realize about $1.18 per share in additional pre-tax expense reduction over the next 2.5 years.  $6b from LAS and $7b from NewBAC.

 

My numbers are $10Bn from LAS (currently ~$12Bn/year down to $2Bn/year in 2015).  This one is huge because it doesn't offset revenue. 

$2Bn+ from litigation (Q2 ~$1Bn, this can come down too, and doesn't offset revenue)

$5Bn more from NewBAC.  ($7Bn as you say, but I'm assuming $2Bn in revenue offsets)

----

I'm at $17Bn pre-tax cost cuts. 

 

And, BAC won't pay cash taxes for years, so the pre-tax numbers are what counts in terms of cash flow, capital generation etc. 

 

These eventually will turn into share repurchases, hopefully sooner rather than later, so the eps really depends on the share count you are assuming.  Your biggest win is they can buy $20Bn of shares each year at 1/2 TBV, for several years. 

 

 

Cutting costs and cleaning up the legacy mess seems to be the best avenue to control a little more their destiny. I think that is why the market is not buying it and pricing it according to what it can earn today or $1 or so.

 

They expect to realize about $1.18 per share in additional pre-tax expense reduction over the next 2.5 years.  $6b from LAS and $7b from NewBAC.

 

The stock is presently priced at a 12% earnings yield to those expense savings on an after-tax basis.  And it's priced at a 14% yield to the current $1 earnings expectation.  So it's a 26% yield to the combination.  Personally I think the stock will do well in the next few years for this reason.

[MrB]

Cutting costs and cleaning up the legacy mess seems to be the best avenue to control a little more their destiny. I think that is why the market is not buying it and pricing it according to what it can earn today or $1 or so.

 

They expect to realize about $1.18 per share in additional pre-tax expense reduction over the next 2.5 years.  $6b from LAS and $7b from NewBAC.

 

The stock is presently priced at a 12% earnings yield to those expense savings on an after-tax basis.  And it's priced at a 14% yield to the current $1 earnings expectation.  So it's a 26% yield to the combination.  Personally I think the stock will do well in the next few years for this reason.

 

Throw in DTA contribution to capital and buy backs with a solid rerating and the upside is quite substantial. However, the bumpy road is unlikely to be over.

I think the best way to handle it is to just say; Please wake me up 5 years from now!

[hardincap]

at 8.1% basel iii tier one capital they should reach 9+ by end of year. any reason you don't see buybacks happening in Q1? even if they dont, jpm will and likely c, and i see this boosting valuations for the sector as a whole. last time jpm announced their buyback i believe bac shot up 10% in a day.

 

Thank you very much, that makes me feel great. 

 

So I presented BAC at a value conference, and I'd say 3 of 30 professional investors there had given it more than a glance post-crisis.  Most comments were along the lines of "ballsy topic!"  The way I interpret those comments are that BAC is just "a huge, risky mess" and they're not going to spend time examining it.  To me, every R&W, LIBOR, DOJ, foreclosure, etc headline just reinforces that view.  I mean, Buffett made a large investment and has been pumping it ever since, and even now professional value investors won't take a look? 

 

There is a strong anti-financial company narrative today (with good reason, I might add).  They did a lot of really shitty and stupid things in 2003-2008.  I think the financial crisis was so searing to people, that the narrative continues today.  But, the companies themselves - both through regulation and management changes - really are trying to clean up their act.  It's taking a lot of time, and a lot of money, and we have a ways to go. 

 

My view is that most people won't touch this (and other financial stocks) due to this strong negative narrative, the headlines, and that it will take years more to resolve the mess from the financial crisis.  As for me, I see the light at the end of the tunnel:  disciplined underwriting, housing bottoming, good credit quality, and costs coming down.  And the holy grail for me, stock buybacks.  Given their price & capital ratios and capital generation, I see this as a meaningful contributor to BAC's long-term value (I don't see why you'd expend capital to issue a 4% mortgage when you can buy your own assets back at 1/3 of book value).  Finger's crossed it happens next year. 

 

 

 

 

 

 

 

 

 

 

XZAP - your analysis is phenomenal...in less than 10 posts I've already learned a ton from your work. My only question is this - do you think the marketplace is naïve enough to take these blatantly absurd litigation numbers (such as the $100B number you cited - something ZeroHedge likes to throw around as well) seriously? While your analysis is compelling, it is not so complex to inhibit the billions of dollars managed by extremely smart, value-oriented investors from driving up the stock price - in other words, why is BAC not at the top of every single hard-core value investor's portfolio? Not once was it discussed at the Sohn Conference, for example.

 

Curious what your thoughts are.

 

Edit: I wasn't clear enough what my question was/is.....basically I am wondering if there is something going on that we're not seeing. The story is just so obvious to me and there are untold numbers of value-investor eyes on the name - what are we missing? Is it merely a time arbitrage story where the market is not going to pay up for something until the free cash actually starts flowing?

[txlaw]

There is a strong anti-financial company narrative today (with good reason, I might add).  They did a lot of really shitty and stupid things in 2003-2008.  I think the financial crisis was so searing to people, that the narrative continues today.  But, the companies themselves - both through regulation and management changes - really are trying to clean up their act.  It's taking a lot of time, and a lot of money, and we have a ways to go. 

 

My view is that most people won't touch this (and other financial stocks) due to this strong negative narrative, the headlines, and that it will take years more to resolve the mess from the financial crisis. 

 

xaxp, the narrative you describe is key to market sentiment on BAC. 

 

Perverse psychology is driving the market price.  That's fine, as long as one is accumulating BAC and has no performance pressure from investors.

[xazp]

at 8.1% basel iii tier one capital they should reach 9+ by end of year. any reason you don't see buybacks happening in Q1? even if they dont, jpm will and likely c, and i see this boosting valuations for the sector as a whole. last time jpm announced their buyback i believe bac shot up 10% in a day.

 

My numbers are the same as yours on capital levels.  Capital generation over the last year has been $20Bn.  Another way to say it is, if the 2013 stress test were identical to 2012's, BAC would pass with a $20Bn repurchase.  Similarly C should be able to pass with the $10Bn in capital they generated, plus, the capital they wanted to return last year minus some margin of safety.  JPM has showed zero capital growth y/y, they gave it to a whale and decent shareholder returns. 

 

I thought C would pass the stress test.  I thought JPM would be returning capital today.  Neither are, and so being wrong in the past, I just say "hope for" a capital return in 2013.  But by my numbers, the potential for 2013 and onward capital returns are very large. 

[hardincap]

ive also had to temper my expectations down quite a bit. i thought bac would be returning capital today, but the fed seems to insist the banks finish building capital before they do.

 

i think the depressed valuations has more to do with the sense that there is something really really awful that is about to happen, more so than the anti financial narrative. 2008 still seems like just yesterday to many people because of how intensely frightening that period was. the threat of european breakup seems reminiscent to early 2008, with politicians' words of reassurance being proven dead wrong over and over again.

 

the shining light i see are the stock buybacks in Q1/Q2. at the rate we're going, it looks like all three major banks will start repurchasing around the same time, and having banks trying to out-do each other in shareholder buybacks is not a bad thing.

 

at 8.1% basel iii tier one capital they should reach 9+ by end of year. any reason you don't see buybacks happening in Q1? even if they dont, jpm will and likely c, and i see this boosting valuations for the sector as a whole. last time jpm announced their buyback i believe bac shot up 10% in a day.

 

My numbers are the same as yours on capital levels.  Capital generation over the last year has been $20Bn.  Another way to say it is, if the 2013 stress test were identical to 2012's, BAC would pass with a $20Bn repurchase.  Similarly C should be able to pass with the $10Bn in capital they generated, plus, the capital they wanted to return last year minus some margin of safety.  JPM has showed zero capital growth y/y, they gave it to a whale and decent shareholder returns. 

 

I thought C would pass the stress test.  I thought JPM would be returning capital today.  Neither are, and so being wrong in the past, I just say "hope for" a capital return in 2013.  But by my numbers, the potential for 2013 and onward capital returns are very large.

[ERICOPOLY]

The warrants and common are now both up roughly 40% from their respective December lows.

[Parsad]

at 8.1% basel iii tier one capital they should reach 9+ by end of year. any reason you don't see buybacks happening in Q1? even if they dont, jpm will and likely c, and i see this boosting valuations for the sector as a whole. last time jpm announced their buyback i believe bac shot up 10% in a day.

 

My numbers are the same as yours on capital levels.  Capital generation over the last year has been $20Bn.  Another way to say it is, if the 2013 stress test were identical to 2012's, BAC would pass with a $20Bn repurchase.  Similarly C should be able to pass with the $10Bn in capital they generated, plus, the capital they wanted to return last year minus some margin of safety.  JPM has showed zero capital growth y/y, they gave it to a whale and decent shareholder returns. 

 

I thought C would pass the stress test.  I thought JPM would be returning capital today.  Neither are, and so being wrong in the past, I just say "hope for" a capital return in 2013.  But by my numbers, the potential for 2013 and onward capital returns are very large.

 

Hey, I had said that BAC would not be buying back shares or paying dividends in 2012.  But I am saying that they will be buying back shares and/or increasing their dividend in 2013, and will be approved after this year's stress tests. 

 

No reason why it should be not be trading near tangible book except because of fear from Europe and the market's general delay in understanding what is happening in the underlying business.  Seen it before, over and over.  This is a 3 bagger over the next five years!  Cheers!

[xazp]

Well BAC looks on target to hit a 9% Basel 3 this year.  The Basel committee realized these rules would be tough on banks, so they gave them 6 years to reach that level.  BAC & C will be done before the rules even start. 

 

Target price in 5 years heavily dependent on share-count reductions in 2013-2014.  Let's say you predict that in 5 years, the market cap will be $200Bn (based on P/E, or book or whatever).  Well at 11B outstanding, that's a 2.5x return.  But at 8B outstanding, that's a 3.5X return.  I think they can buy 3Bn shares in the next 3 years, if prices remain low.  The longer prices remain at these levels, the higher your ultimate 5-year return.  To me that is the biggest wild card. 

 

 

 

 

 

 

 

 

 

Hey, I had said that BAC would not be buying back shares or paying dividends in 2012.  But I am saying that they will be buying back shares and/or increasing their dividend in 2013, and will be approved after this year's stress tests. 

 

No reason why it should be not be trading near tangible book except because of fear from Europe and the market's general delay in understanding what is happening in the underlying business.  Seen it before, over and over.  This is a 3 bagger over the next five years!  Cheers!

[bargainman]

 

Throw in DTA contribution to capital and buy backs with a solid rerating and the upside is quite substantial. However, the bumpy road is unlikely to be over.

I think the best way to handle it is to just say; Please wake me up 5 years from now!

 

I don't know.  Personally I think the best way to handle it is to work with the ups and downs.  I'm selling puts to get paid while I wait to buy more at a cheaper price, and sell some calls (on part of my shares), plus have some warrants.  That way I get income while I wait.  Today you sell Sep $7 puts for .4 which is at least a 30% annualized return.  Worst case is that you get put the shares at a net of 6.6, then wait or sell some calls on it.  I think AIG has even better premiums, and MBIA's are off the hook.  But I definitely don't do this with my full position, as I want the unlimited upside spikes too.

[Packer16]

Here are the numbers for the stock vs warrant analysis under Sanjeev's 3 bagger in 5 year scenario.  The stock will go up 3x (7 to 21).  The "B" warrant intrinsic value will be $7.7 with about 2 years to go until expiration.  To estimate the time value I will use the "borrowing rate" of other in the money TARP warrants (which ranges from 3% to 4%).  The "borrowing rate" is calculated as: ((Warrant price - intrinsic value)/Strike Price) ^ (1/years to expiration).  If we use a 3.5% "borrowing rate" then the time value in 5 years will be: $0.95 =  13.30 * ((1 + .035) ^ 2 - 1).  Therefore in 5 years the "B" warrant will be worth $8.65.  With current price of $2.95, the upside is 193% less than the stock with more downside than the stock, therefore the stock is preferable to the warrants in this scenario.

 

Packer

[Green King]

Here are the numbers for the stock vs warrant analysis under Sanjeev's 3 bagger in 5 year scenario.  The stock will go up 3x (7 to 21).  The "B" warrant intrinsic value will be $7.7 with about 2 years to go until expiration.  To estimate the time value I will use the "borrowing rate" of other in the money TARP warrants (which ranges from 3% to 4%).  The "borrowing rate" is calculated as: ((Warrant price - intrinsic value)/Strike Price) ^ (1/years to expiration).  If we use a 3.5% "borrowing rate" then the time value in 5 years will be: $0.95 =  13.30 * ((1 + .035) ^ 2 - 1).  Therefore in 5 years the "B" warrant will be worth $8.65.  With current price of $2.95, the upside is 193% less than the stock with more downside than the stock, therefore the stock is preferable to the warrants in this scenario.

 

Packer

 

Thank You

I am sure this will be valuable in the road ahead.

[obtuse_investor]

Excellent analysis on this thread....

 

I just wanted to say that it would be icing on the cake if BAC is able to do significant buyback under TBV. The likelihood of that is probably small. As we saw in the early part of 2012, as soon as the clouds clear, this stock pops up significantly, wiping out the huge discount to TBV.

 

If you are on counting on that accretive buyback to happen, you may be disappointed.

 

Plan for the worst. Hope for the best.

[Sunrider]

Here are the numbers for the stock vs warrant analysis under Sanjeev's 3 bagger in 5 year scenario.  The stock will go up 3x (7 to 21).  The "B" warrant intrinsic value will be $7.7 with about 2 years to go until expiration.  To estimate the time value I will use the "borrowing rate" of other in the money TARP warrants (which ranges from 3% to 4%).  The "borrowing rate" is calculated as: ((Warrant price - intrinsic value)/Strike Price) ^ (1/years to expiration).  If we use a 3.5% "borrowing rate" then the time value in 5 years will be: $0.95 =  13.30 * ((1 + .035) ^ 2 - 1).  Therefore in 5 years the "B" warrant will be worth $8.65.  With current price of $2.95, the upside is 193% less than the stock with more downside than the stock, therefore the stock is preferable to the warrants in this scenario.

 

Packer

 

Got you now - so basically just the TV amortised over the remaining life. Thanks for the explanation.

[ERICOPOLY]

Regarding the comparison of stock vs warrant:

 

The breakeven point changes when the dividend from the common is reinvested in more shares.

 

The warrant's dividend just reduces it's strike price... in other words, the dividend get's allocated to 0% return.

 

Lets say you for example own the common and collect a lot of dividends with the stock hovering around $10-$15 and you buy more common with it.  Once you've accumulated a lot of extra stock, then the share price heads to $30.

 

Calculation changes...  you can calculate the worst case performance of the stock vs the warrant, but you cannot calculate the best case.

 

[racemize]

Regarding the comparison of stock vs warrant:

 

The breakeven point changes when the dividend from the common is reinvested in more shares.

 

The warrant's dividend just reduces it's strike price... in other words, the dividend get's allocated to 0% return.

 

Lets say you for example own the common and collect a lot of dividends with the stock hovering around $10-$15 and you buy more common with it.  Once you've accumulated a lot of extra stock, then the share price heads to $30.

 

Calculation changes...  you can calculate the worst case performance of the stock vs the warrant, but you cannot calculate the best case.

 

that's a good way to think about it.  However, I thought the dividend calculation was a bit more complicated (e.g., based on its yield at the time of payout, rather than a strict 1:1 adjustment).

[Packer16]

Given BAC's TBTF status, what types of dividends are you expecting?

 

Packer

[racemize]

seems reasonable to expect some dividend increase in the next 5 years.  They'll pass stress tests with a buyback/dividend within the year already.

 

Additionally, a normal rate of dividend for banks is around 33% of earnings.  If we get to the theoretical 10% ROE of $20 BPVS, that's $2 EPS.  Multiplying that by 33% gives 66 cents per share in dividends, which is a 16.5x increase over the current 4 cents.

[ERICOPOLY]

Given BAC's TBTF status, what types of dividends are you expecting?

 

Packer

 

30% dividend payout ratio if still building capital.  But look if they're already at 9% by then... well then 30% should be the floor of what they can do.  Given that Moynihan only wants to do about 30% anyhow, then my personal expectation is for a 30% dividend payout.

 

And if 30% is the dividend payout ratio, then 40% for a buyback ratio seems like a reasonable floor if they're already at 9%.  The more they let them payout while still maintaining 9%, the less TBTF they get.  One way to solve TBTF over the long term is to penalize TBTF with 9% ratios so that it makes best economic sense to payout the earnings, meanwhile the smaller firms retain and grow with their 7% ratios and thus better economics.  The growth occurs in the less risky firms, thus the system in theory becomes less concentrated over time.

 

http://www.bloomberg.com/news/2011-03-18/jpmorgan-leads-22-billion-increase-in-payouts-buybacks-after-fed-review.html

 

 

The Fed told banks in November to consider conservative payouts that would still allow for a significant build-up of capital. Firms are “generally expected” to limit 2011 dividends to 30 percent of expected earnings, the Fed said yesterday.

 

 

[xazp]

I think this is a good way to look at things over the long run (beyond 5 years) but in the short-term I think the picture is even better. 

 

First, it's really the capital growth and ratio that matters.  For most banks, capital growth approximates earnings, but for BAC it's growing at 1.5x earnings for at least a few years due to DTAs.  So in that context, I actually see total payouts reaching 100% of earnings, which would still allow B3 capital to grow at .5x earnings.

 

Second, BAC's Basel 3 ratio is destined to grow even without more capital.  This is just the math of converting one of their 1,000,000 foreclosed homes into cash.  This converts a highly-risky/capital intensive asset into a non-risky asset.  There must be tens of billions of dollars of capital held against bad mortgages/loans.  And as they are replaced by either cash or  good loans, the amount of capital needed declines.  Incidentally, this is how BAC and C have essentially gone from worst to first in capital ratios - it's simply the math of converting high-risk, yucky loans into cash and changing around the risk-weighting of their portfolio.

 

Third, remember that BAC has not really returned capital in 4 years.  So there may be a period where BAC can return extra, because they've been accumulating for so long. 

 

Fourth, I think (OK, hope) they will heavily weight their distributions to buybacks as long as the bank is below TBV.    I would strongly prefer 100% in buybacks (other than a token dividend) over a more even split between dividends/buybacks. 

 

 

 

30% dividend payout ratio if still building capital.  But look if they're already at 9% by then... well then 30% should be the floor of what they can do.  Given that Moynihan only wants to do about 30% anyhow, then my personal expectation is for a 30% dividend payout.

 

And if 30% is the dividend payout ratio, then 40% for a buyback ratio seems like a reasonable floor if they're already at 9%.  The more they let them payout while still maintaining 9%, the less TBTF they get.  One way to solve TBTF over the long term is to penalize TBTF with 9% ratios so that it makes best economic sense to payout the earnings, meanwhile the smaller firms retain and grow with their 7% ratios and thus better economics.  The growth occurs in the less risky firms, thus the system in theory becomes less concentrated over time.

 

http://www.bloomberg.com/news/2011-03-18/jpmorgan-leads-22-billion-increase-in-payouts-buybacks-after-fed-review.html

 

 

The Fed told banks in November to consider conservative payouts that would still allow for a significant build-up of capital. Firms are “generally expected” to limit 2011 dividends to 30 percent of expected earnings, the Fed said yesterday.

[MrB]

Don't forget about Warren's warrants. Not an insignificant number, especially with the dividends you guys are talking about.