BAC-WT - Bank of America Warrants

[racemize]

For how long can the warrants rise less than the stock? this makes no sense to me.

 

I calculate it should rise (and fall) by about 2X the share.

 

I think the A warrants are fairly valued, in spite of their low volume. Since the start of the year, the volatility of BAC commons has dropped significantly (see attached BAC volatility over last 52 weeks). This reduces the value of the options/warrants based on the Black Scholes.

 

Hence, much to my discontent, I deduce that BAC warrants are fairly priced considering how misguided Black Scholes is for long dated instruments.

 

You mean they are "fairly priced" according to Black Scholes or are you making some other assertion?

[obtuse_investor]

For how long can the warrants rise less than the stock? this makes no sense to me.

 

I calculate it should rise (and fall) by about 2X the share.

 

I think the A warrants are fairly valued, in spite of their low volume. Since the start of the year, the volatility of BAC commons has dropped significantly (see attached BAC volatility over last 52 weeks). This reduces the value of the options/warrants based on the Black Scholes.

 

Hence, much to my discontent, I deduce that BAC warrants are fairly priced considering how misguided Black Scholes is for long dated instruments.

 

You mean they are "fairly priced" according to Black Scholes or are you making some other assertion?

 

Fair enough! :)

 

I am asserting that they are fairly priced according to Black Scholes-- no matter how unfair it is.  ;)

[racemize]

Fair enough! :)

 

I am asserting that they are fairly priced according to Black Scholes-- no matter how unfair it is.  ;)

 

That's what I thought, just wanted to make sure.  I personally hope the warrants stay down, as I'm hoping to get more of them (already have a good chunk of common).

[Olmsted]

I love the subtle hinting, Obtuse!

[writser]

I find this interesting- analyst predictions for BAC. for comparison, I've added WFC's analyst predictions as well.

I find analysts are pretty good at these things. You should ignore all the "buy,hold sell" BS,- that's just politics, but they're mostly pretty damn close with earning predictions. Think about it- it's pretty shocking if a company you hold's earnings are off by more than 10c from what analysts expected- maybe it's a wisdom of the crowds thing- especially if you have 32 analysts following the company. That said, maybe one should adjust for a slight optimism, but on the other hand, companies do that for us- companies tend to mislead analysts to thinking their earnings will be slightly lower than the truth so they could "beat the estimate".

 

http://www.smartmoney.com/quote/bac/?story=earningsforecast

 

http://www.smartmoney.com/quote/WFC/?story=earningsForecast

 

Not that it really matters in this context, but are the analysts really good at their job, or are the companies fitting their earnings to the forecasts? I remember reading an article that showed a very skewed distribution of actual earnings vs forecasts, i.e. in 80% of the cases companies meet estimates or beat them with a very small margin, and in 20% of the cases they miss estimates but with a margin that is on average much larger. I cannot remember where I read the article, unfortunately ..

[Arden]

MYD- You're right, I was referring to percentage movements.

 

Obtuse- Thanks for the chart. What I did in my calculation is this- I reverse engineered the day before's implied volatility, and used that to calculate the new fair value assuming a new stock price and the same volatility.

 

Although not perfect, I think this makes sense and it's even conservative, because on the day in question the stock rose by 5%, and even for BAC that certainly raises average volatility- so in fact the change should have been even greater than 10%, but we got only 3.5%.

 

Regarding the chart- is BAC's volatility really that low now?

[Guest rimm_never_sleeps]

yes the warrants are fairly priced according to the hocus pocus of black scholes. take that information and do with it what you will.

[Olmsted]

What I did with it was switch my remaining common to warrants.

[dcollon]

Comments from sell-side on BAC's presentation at conference today:

 

Overall, CFO Thomson's comments at the Barclays conference this afternoon were in line with prior management comments and no new specific guidance was given. Thus, we continue to believe the bank's PPNR recovery will trail expectations in 2012-14 and our EPS estimates remain $0.50 in 2012, $0.85 in 2013, and $1.00 in 2014, which are below Consensus of $0.62, $0.92, and $1.27, respectively. Overall, we're still forecasting ROTCE of 6-7% in 2013-14.

 

Highlights from the presentation include:

• 6 Key Points on BAC from CFO (not new): 1) Businesses have strong leadership positions, 2) Strengthened capital, 3) Strong liquidity, 4) $8bn in cost savings initiatives are underway, 5) Improved credit quality, and 6) management focus on core earnings

• Consumer Business: Largest retail deposit market share in the U.S. - low cost stable form of funding; No. 1 in online banking capabilities with 30.2 million active users; No. 1 mobile bank with 10.3 million active users.

• Consumer Products Repositioned As Relationship Deepening Levers - repositioned core consumer products such as credit cards and home loans to deepen customer relationships; mortgage business now focused on origination of core mortgage products, many to be held on balance sheet; exited correspondents; exited forced-place insurance; and reduced origination volume by more than 50% to focus service on BAC customers;

• Global Commercial, Corporate and Institutional Investor Franchise: Among Top 1-3 in many Investment Banking, Research, and Sales and Trading Rankings (from Greenwich, Institutional Investor, etc.)

• Basel 3 Update: BAC's estimated Tier 1 common capital ratio (Basel 3) at 6/30/12 is 8.1% on a fully phased-in basis; Tier 1 common capital estimated at $126.8B; risk-weighted assets are estimated to be $1.566T; 8.10% assumes final U.S. Market Risk rules and BIS Basel 3 guidelines; However, BAC's calculation isn't as stringent as peers, and we estimate that its B3 ratio under a "standard" approach would be 7.8%-8.0% (in line with JPM and C); Going forward, BAC continues to see opportunity in numerator (earnings and reduce deductions such as MSRs) and denominator (reduce RWAs) to continue to improve the ratio. 

• Global Excess Liquidity Sources strong at $378B

• 3Q long-term debt activity: $12B parent company maturities and $6B calls and redemptions to drive down interest expense; greatest opportunity to reduce funding costs is continued reduction in long-term debt as this expense is approximately 5X the cost of deposits and long-term debt is one-third the amount of deposit funding. 

• Lowering the Costs to Serve Clients: continue to work in 3Q to take Legacy Assets & Servicing (LAS) expense expenses down by 4Q and beyond (from $2.8bn in 2Q12).

• New BAC: Total annualized project cost savings expected of $8B once fully implemented; Phase 1: Expect $5B annualized cost savings by end of 2013 with the full impact realized in 2014; Phase 2: Expect $3B annualized cost savings by mid-2015.

• Credit Quality: Early-Stage Consumer Delinquencies Show Continued Improvement in Cards and Mortgages

 

 

Q/A:

 

• Audience poll - What would cause investors to buy BAC stock? 52% of audience said need more clarity on mortgage repurchase risk. No materially new insight was given by Mr. Thomson. In our opinion, BAC remains the most exposed bank to rep and warranties risk. Clearly, BAC is disputing claims because its approved repurchases fell from over $2bn in 2Q11 and 3Q11 to $1.2bn in 4Q11 to only $480mn in 1Q12 and $704mn in 2Q12. Thus, BAC appears to remain in gridlock with Fannie Mae and private label bondholders regarding their mortgage repurchase claims and BAC's liability for reps and warranties on previously securitized mortgages. These disputes are likely to lead to more repurchase provisions and litigation costs over the next two years. BAC's outstanding repurchase claims have jumped from $9.9bn in 2Q11 to $22.7bn by 2Q12. At the same time, BAC's mortgage repurchase reserve has declined from $17.8bn in 2Q11 to $15.9bn by 2Q12, and its repurchase provision was only $395mn in 2Q after less than $300mn in each of the prior 3 quarters. To us, these are ominous trends that will ultimately reduce EPS in 2013-14 due to higher litigation and repurchase costs than investors are probably anticipating. This is our view, and is not the response of Mr. Thomson.

• Audience poll - What would cause investors to get more comfortable w/ mortgage repurchase risk? Answer - more settlements.

• Audience poll - What are your expectations for 2013 CCAR? Majority of audience expects a modest dividend increase. We estimate a dividend increase to $0.05/share quarterly in 2013 from just $0.01/share currently.

• Interest rates and NII: No change vs. comments from 2Q12 earnings call. Core NII of ~$10.25bn at 2Q12. We estimate NII of $10.2bn in 3Q as recent liability cost reductions are offset by more asset yield pressure.

• Revenue growth opportunities? Currently seeing commercial and corporate loan growth. In position to grow and continue to attract and train FAs in wealth management business and hire more bankers (up to 1,000), and continued focus on institutional loan growth from commercial and banking side. 

• Cross-sell opportunities? Big push to get everything that comes out from corporate customers (investment banking business, lending, treasury, etc.) and consumers (banking products, estate planning, mortgages, etc). Still in early innings of this process.

• 3Q update? Coming into 3Q - was a lot more concern regarding Europe than today, but M&A activity is still relatively slow, companies are still cautious, portfolios in commercial space present opportunities for BAC to capture that.

• Close more branches? Already part of New BAC effort - down 400-500 branches and continue to evaluate the branch network as they go forward.

• Too big to manage - spin out businesses? Already sold over $50bn of non-core assets over last 2.5 years. BAC will continue to shrink businesses that are not core to its customers, with core earnings driving decision making.

 

[Parsad]

Thanks very much Dcollon!  Much appreciated.  Cheers!

[onyx1]

Thanks for posting this dcollon!

[ERICOPOLY]

The presentation (page 13) effectively states that Phase I New BAC will be fully completed within FY 2013 (actually the wording suggests that the Phase I cuts will be fully completed by the end of Q3 next year).  That's sooner than I had thought.

 

Expect $5B annualized cost savings by the fourth quarter of 2013 with the full impact realized in 2014

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDc5MjE2fENoaWxkSUQ9NTEyNTcyfFR5cGU9MQ==&t=1

[berkshiremystery]

Bank Of America Surges Ahead Again

http://seekingalpha.com/article/861171-bank-of-america-surges-ahead-again?source=yahoo

 

<snip>...

 

"With interest rates so low, and money so cheap, Bank of America has been able to turn its business around without taking on risks. Of course, the company has made a conscious decision to make themselves smaller. It is working, but the shares are still selling for less than half of the book value of the company.

 

That is an investor opportunity in my book. Of course, not everyone on Wall Street is a believer yet, but that's just fine for folks who want to buy shares now, at bargain prices. When the "horse" is let out of the "barn," it will be too late to stop that horse from galloping away. The investors will be chasing, rather than investing.".

...</snip>

[MrB]

Freddie Mac to recover billions extra from loan reviews: regulator

http://finance.yahoo.com/news/freddie-mac-recover-billions-extra-040940993.html

 

 

(Reuters) - Freddie Mac will recover up to $3.4 billion more from banks after closely scrutinizing soured loans it bought during the housing boom, a regulator's watchdog reported on Thursday.....

[racemize]

Freddie Mac to recover billions extra from loan reviews: regulator

http://finance.yahoo.com/news/freddie-mac-recover-billions-extra-040940993.html

 

 

(Reuters) - Freddie Mac will recover up to $3.4 billion more from banks after closely scrutinizing soured loans it bought during the housing boom, a regulator's watchdog reported on Thursday.....

 

from the article:

Loans in which borrowers have made payments for 36 consecutive months would also be largely exempt from repurchase requests.

 

Isn't this what BofA was saying they were doing and shouldn't?  Does the watchdog actually know something?  It seems like this is just the same opinion of Freddie Mac, but we still don't know who is correct.

[xazp]

As the article says, BAC and Freddie completely settled all claims in early 2011.  So you can interpret this article as saying "companies other than BAC ... owe Freddie $3.6Bn."  My recollection is BAC is the only major company to have settled with Freddie.  Freddie later came under fire because the settlement was done before they expanded their internal definition of what loans could be looked over - so BAC got a good deal there.

 

Now if you assume that Fannie is going to also ask for 36 months, then the disagreement is over the length of time - BAC says 24 months, to Fannie's 36 months.

 

BAC has alluded to having a special contract with Fannie which says something about "business as usual."  BAC has not spelled it out clearly, but my guess is that Fannie has always said 24 months of look-back is sufficient; then they switched to a 36 month look-back.  BAC says this is not "business as usual" and that Fannie isn't entitled to do that.  Fannie obviously disagrees.  If you find fault with a loan, but it paid for more than 2 years, is the default because of the economy, or because of mistakes with the loan?

 

The current level of disagreement is about $8Bn of mortgages which have > 24 payments, and they expect that number to increase.  My rough modeling of the downside would be something like $16Bn of mortgages in dispute (double today's level), and a 30% payout, or around $5Bn. 

 

 

 

Freddie Mac to recover billions extra from loan reviews: regulator

http://finance.yahoo.com/news/freddie-mac-recover-billions-extra-040940993.html

 

 

(Reuters) - Freddie Mac will recover up to $3.4 billion more from banks after closely scrutinizing soured loans it bought during the housing boom, a regulator's watchdog reported on Thursday.....

 

from the article:

Loans in which borrowers have made payments for 36 consecutive months would also be largely exempt from repurchase requests.

 

Isn't this what BofA was saying they were doing and shouldn't?  Does the watchdog actually know something?  It seems like this is just the same opinion of Freddie Mac, but we still don't know who is correct.

[racemize]

As the article says, BAC and Freddie completely settled all claims in early 2011.  So you can interpret this article as saying "companies other than BAC ... owe Freddie $3.6Bn."  My recollection is BAC is the only major company to have settled with Freddie.  Freddie later came under fire because the settlement was done before they expanded their internal definition of what loans could be looked over - so BAC got a good deal there.

 

Now if you assume that Fannie is going to also ask for 36 months, then the disagreement is over the length of time - BAC says 24 months, to Fannie's 36 months.

 

BAC has alluded to having a special contract with Fannie which says something about "business as usual."  BAC has not spelled it out clearly, but my guess is that Fannie has always said 24 months of look-back is sufficient; then they switched to a 36 month look-back.  BAC says this is not "business as usual" and that Fannie isn't entitled to do that.  Fannie obviously disagrees.  If you find fault with a loan, but it paid for more than 2 years, is the default because of the economy, or because of mistakes with the loan?

 

The current level of disagreement is about $8Bn of mortgages which have > 24 payments, and they expect that number to increase.  My rough modeling of the downside would be something like $16Bn of mortgages in dispute (double today's level), and a 30% payout, or around $5Bn. 

 

Thanks, I had been thinking that the settlement with Freddie didn't cover all the claims (i.e., only applied to a prior time frame) and so was under the impression the article was talking about those outside of that time frame.  Your explanation makes sense.

[xazp]

So the Freddie settlement was for *all* mortgages sold 2008 and prior, which covers most of their risk from Freddie. 

 

Concurrently, they settled with Fannie, but that settlement only covered put-back claims through late 2010.  BAC believed, not unreasonably, that the Fannie settlement would bracket and inform their total Fannie liability, and that's what their reserves are based on.  But in the last year or so, Fannie has started asking for put-backs on mortgages that previously had not been under discussion (i.e. > 24 payments) and BAC disagrees.  BAC's position is if they paid for two years+, then the default was due to the economy and not crappy Countrywide paperwork. 

 

 

 

Thanks, I had been thinking that the settlement with Freddie didn't cover all the claims (i.e., only applied to a prior time frame) and so was under the impression the article was talking about those outside of that time frame.  Your explanation makes sense.

[wescobrk]

Eric probably about 150k this morning! :)

Nice!

[wescobrk]

I meant made

[bobp]

The A warrants have really lagged behind the common in this run-up. The last time the common traded this high the warrants were near 4 1/2. This could of course mean they're a screaming buy, and I did just buy a little. Then again, that's a good contra indicator right there.

I don't buy any reduced volatility pricing arguments, if that's why they're not moving. I think with the common at 9.40 the warrants are cheap. When it's me vs Black Scholes I go with me. But no I haven't used Black scholes.

 

My first post. I'll stop before I say anything too stupid.

[racemize]

The A warrants have really lagged behind the common in this run-up. The last time the common traded this high the warrants were near 4 1/2. This could of course mean they're a screaming buy, and I did just buy a little. Then again, that's a good contra indicator right there.

I don't buy any reduced volatility pricing arguments, if that's why they're not moving. I think with the common at 9.40 the warrants are cheap. When it's me vs Black Scholes I go with me. But no I haven't used Black scholes.

 

My first post. I'll stop before I say anything too stupid.

 

I agree with your thinking re comparison of warrants to common at the current prices.  I have the break-over point at roughly 22 dollars at this point.  My next purchase of BAC will most assuredly be the warrants, as I have a significant amount of common.

[nkp007]

The warrants have an outstanding float of ~$500 million. It's really not big enough for most funds to get into and as a result, it'll act whacky when it damn well pleases.

[Parsad]

The A warrants have really lagged behind the common in this run-up. The last time the common traded this high the warrants were near 4 1/2. This could of course mean they're a screaming buy, and I did just buy a little. Then again, that's a good contra indicator right there.

I don't buy any reduced volatility pricing arguments, if that's why they're not moving. I think with the common at 9.40 the warrants are cheap. When it's me vs Black Scholes I go with me. But no I haven't used Black scholes.

 

My first post. I'll stop before I say anything too stupid.

 

We added a few more A-warrants today.  They are out of whack.  Eventually they will catch up.  Cheers!

[PlanMaestro]

We added a few more A-warrants today.  They are out of whack.  Eventually they will catch up.  Cheers!

 

True that. I even bought Bs in quantity.