BAC-WT - Bank of America Warrants

[Uccmal]

 

 

What's the total amount of relief that BAC needs to go through?  Just wondering the % completion with this $15.8B figure.  I understand that the values of different programs are weighted differently, but just'd like a rough idea.

 

The total settlement was for 25 b for all the banks.  I would think BAC is nearly done.  The deadline to apply is January sometime. 

[Uccmal]

Everywhere I look it up the 25 B is mentioned without a breakdown by bank. 

 

Once this is done the cost of the legacy program should drop substantially. 

 

 

[treasurehunt]

Everywhere I look it up the 25 B is mentioned without a breakdown by bank. 

 

Once this is done the cost of the legacy program should drop substantially.

 

You can find the details here: https://d9klfgibkcquc.cloudfront.net/Mortgage_Servicing_Settlement_Fact_Sheet.pdf

 

BofA's total obligation is about 11.8 billion. But I don't think you can compare this number directly to the 15.8 billion in BofA's press release; there is some formula that is used to give credit for various actions such as principal reduction, short sales etc.

 

Ally Financial, Inc.

FEDERAL AND STATE  PAYMENTS: $110 million

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $200 million

 

Bank of America Corp. (including EDNY FHA origination settlement)

FEDERAL AND STATE  PAYMENTS: $3.24 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $8.58 billion

 

Citigroup, Inc.

FEDERAL AND STATE  PAYMENTS: $415 million

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $1.79 billion

 

 

J.P. Morgan Chase & Co.

FEDERAL AND STATE  PAYMENTS: $1.08 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $4.21 billion

 

Wells Fargo & Co.

FEDERAL AND STATE  PAYMENTS: $1.01 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $4.34 billion

 

[xazp]

Agree with treasurehunt's post, though with the added commentary that it doesn't really matter. 

 

The banks are simply realizing losses they've already stuffed into their loan-loss reserves.  So, if their accounting says that mortgage X is a $50,000 loss, they simply tell mortgagee X they're forgiving $50,000 of principal.  In the earnings & cash flow sense these big numbers don't cost BAC much outside of operating costs. 

 

My sense is the big operating costs are from past foreclosure reviews & current/future foreclosures.  Here, too, they are somewhat streamlining the process by pushing for short-sales, which they also get some credit for. 

 

You can find the details here: https://d9klfgibkcquc.cloudfront.net/Mortgage_Servicing_Settlement_Fact_Sheet.pdf

 

BofA's total obligation is about 11.8 billion. But I don't think you can compare this number directly to the 15.8 billion in BofA's press release; there is some formula that is used to give credit for various actions such as principal reduction, short sales etc.

 

Ally Financial, Inc.

FEDERAL AND STATE  PAYMENTS: $110 million

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $200 million

 

Bank of America Corp. (including EDNY FHA origination settlement)

FEDERAL AND STATE  PAYMENTS: $3.24 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $8.58 billion

 

Citigroup, Inc.

FEDERAL AND STATE  PAYMENTS: $415 million

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $1.79 billion

 

 

J.P. Morgan Chase & Co.

FEDERAL AND STATE  PAYMENTS: $1.08 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $4.21 billion

 

Wells Fargo & Co.

FEDERAL AND STATE  PAYMENTS: $1.01 billion

RELIEF TO BORROWERS (Principal Writedown, Refinancing,and Other Programs): $4.34 billion

[Uccmal]

That was my sense as well - that these are already reserved for. 

 

Someone else may have mentioned this but as some of these situations normalize the banks income may rise somewhat.  i.e. Someone who couldn't make payments at x+1, can now afford to make payment x.  Also by removing the underwater portion of a loan, mortgagees may be more incentivized to keep paying.  Sunk costs and all that stuff.

 

Now if I could convince Fist National to forgive 100 g of my mortgage....

[ERICOPOLY]

The work to comply with that legal settlement this year was completed by the LAS division.

 

My comment on cost coming down in either Q1 or Q2 was motivated by this calculation:

 

250,000 - 300,000 normal run rate of delinquent loans will cost LAS $2b a year.

900,000 delinquent loans is currently costing them $12b a year.

 

3x the normal work load costs them 6x the normal cost.

 

Under the present annual cost of 12b, they did extra work for that settlement yet still managed to burn through 300,000 of delinquent loans (last year it was 1,200,000 delinquent loans).

 

Next year they plan to burn through another 300k of excess loans (and no settlement related work).

The following year they plan to burn through the remaining 300k of excess loans (and no settlement related work).

That will leave them with just 300k of loans (the normal run rate)

 

What I'm wondering for next year is whether the phrase "and no settlement work" is worth anything from an expense standpoint for LAS.  Like, weren't there live bodies assigned to these tasks?

[xazp]

Yes my numbers are similar to yours.  I'm making a (perhaps unimportant) distinction that I think the big costs are the operating costs on the foreclosure portion of the settlement, and not the "mortgage forgiveness" side.  i.e. the reductions come from operating costs as opposed to loan-loss reserves, credit, etc.

 

My reading of the operating costs says there will be a sizeable drop Q1 or Q2 next year, like you. 

 

 

The work to comply with that legal settlement this year was completed by the LAS division.

 

My comment on cost coming down in either Q1 or Q2 was motivated by this calculation:

 

250,000 - 300,000 normal run rate of delinquent loans will cost LAS $2b a year.

900,000 delinquent loans is currently costing them $12b a year.

 

3x the normal work load costs them 6x the normal cost.

 

Under the present annual cost of 12b, they did extra work for that settlement yet still managed to burn through 300,000 of delinquent loans (last year it was 1,200,000 delinquent loans).

 

Next year they plan to burn through another 300k of excess loans (and no settlement related work).

The following year they plan to burn through the remaining 300k of excess loans (and no settlement related work).

That will leave them with just 300k of loans (the normal run rate)

 

What I'm wondering for next year is whether the phrase "and no settlement work" is worth anything from an expense standpoint for LAS.  Like, weren't there live bodies assigned to these tasks?

[meiroy]

 

"http://online.wsj.com/article/SB10001424127887324595904578119140604024484.html"

FHA Nears Need for Taxpayer Funds

 

 

Would that mean an increase in litigation pressure, or incentive to settle sooner by all relevant parties, or incentive for some relevant parties to try and delay process.

 

[ERICOPOLY]

Sometimes when Moynihan speaks (like on the webcast before the most recent one) he is much more cautious when he talks about the pace of reduction in LAS.  On that webcast he merely promised that the work would be fully complete by FYE'14 and that the costs would be fully out by mid-FY'15, explaining that it can take 6 months for the costs to completely drop off after the work is complete.

 

Yet sometimes when he is really happy (like during that Q3 conference call) he seems to provide a less cautious estimate that I presume is what he deems quite possible to happen.

 

For example, here is an answer that he gave on the Q3 conference call transcript:

 

Matthew O'Connor - Deutsche Bank: May be I'll just toss the numbers at there, you are at a $12 billion annual run rate right now. I feel like at one point you said $2 billion could be a more sustainable level as you move through all of this. So that's a $10 billion decline. Any guess on does it take two years to get through that, is it five years to get through that?

 

Brian T. Moynihan - CEO: I think we'd look at it and say '13 and into '14 you would be through that based on everything we know today. But again, that's subject to caveat if someone is changing the rules – something changing the rules. But right now, as we said, we'd expect that the – as we move through next year, the year-end numbers would still be elevated. But as we move into '14, you'd see them come down to more normalized levels. We're doing everything we can do move – to get through this as quickly as possible.

 

Now doesn't it sound like he means to suggest that the steepest part of the costs come out next year in FY'13?  But that he concedes there still might be some costs to come out further in FY'14?

 

[xazp]

OK the stress tests are out, enjoy!

 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20121115a1.pdf

 

The important part are the various assumptions in the "severely adverse" scenario.  I'm comparing the worst assumption in 2012 stress tests to the worst assumptions in 2013's. 

 

2012 vs 2013

GDP -8.9% vs -6.1%

Housing bottom  108 vs 113

 

At least on these two metrics, the stress test is less severe than last year, which in turn should mean higher capital returns are possible. 

 

Here is last years' for comparison http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdf

 

 

[PlanMaestro]

Thanks xazp (big smile). Time to check the international crisis guideline.

 

OK the stress tests are out, enjoy!

 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20121115a1.pdf

 

The important part are the various assumptions in the "severely adverse" scenario.  I'm comparing the worst assumption in 2011 stress tests to the worst assumptions in 2012's. 

 

2011 vs 2012

GDP -8.9% vs -6.1%

Housing bottom  108 vs 113

 

At least on these two metrics, the stress test is less severe than last year, which in turn should mean higher capital returns are possible. 

 

Here is last years' for comparison http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdf

[meiroy]

 

What does this mean "Time to check the international crisis guideline."?

[meiroy]

 

"http://online.wsj.com/article/SB10001424127887324595904578119140604024484.html"

FHA Nears Need for Taxpayer Funds

 

 

Would that mean an increase in litigation pressure, or incentive to settle sooner by all relevant parties, or incentive for some relevant parties to try and delay process.

 

Another link from the fantastic Calculated risk:

 

 

"it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.

emphasis added

 

Clearly Bernanke and the Fed are concerned that credit isn't flowing to a large segment of the population.

Read more at http://www.calculatedriskblog.com/2012/11/bernanke-suggests-mortgage-lending.html#RGA4sWgA1ibEA5Dd.99 "

 

To me it seems that when the fed clearly states that, it's a tipping point in favor of the banks. Have they stated anything similar before? If not, it's absolutely huge. Regulation might be loosened instead of tightened.

 

 

 

[Uccmal]

Calculated Risk is an awesome blog.

 

Anyway, Maybe the tight lending standards are the big banks response to being cajoled into buying crappy companies, and then having their asses sued off, and ostrasized, continuously for 4 years.  Just maybe.... dya think. 

 

Less regulation is not the solution.  Regulating properly might help.

[xazp]

Well for kicks you could estimate how much capital BAC "could" return.  I think there are two constraints. 

1)  CCAR:  since CCAR is less severe than last year, and, BAC passed last year - they could return all the capital they generated from Q3 2011 - Q3 2012 and in theory would pass CCAR.  BAC has generated $20Bn of capital since Q3 2011, so this constraint says capital return <= $20Bn. 

 

2)  Basel 3:  Moynihan states that he wants to keep capital at 9%.  Since they are at that point today, whatever capital they generate Q4 2012 - Q4 2013 should also be returnable.  Analyst estimates are about $1 for next year, add say .25c for Q4 2012.  Multiply by 1.4x for the DTA multiplier and you get about $17.5Bn.

 

In other words, in theory, BAC can return $17.5Bn, and

-- in a severe recession maintain 5%+ Tier 1 capital through 2015 (CCAR constraint)

-- in the baseline case end 2013 with 9% Basel 3 Tier 1 capital (Moynihan constraint)

 

I'm probably being too aggressive, but I still think/hope we see $10-$15Bn returned next year.  Which itself is well above what any analysts say.  But that's what my understanding of the capital returns says.  We'll see. 

 

 

OK the stress tests are out, enjoy!

 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20121115a1.pdf

 

The important part are the various assumptions in the "severely adverse" scenario.  I'm comparing the worst assumption in 2012 stress tests to the worst assumptions in 2013's. 

 

2012 vs 2013

GDP -8.9% vs -6.1%

Housing bottom  108 vs 113

 

At least on these two metrics, the stress test is less severe than last year, which in turn should mean higher capital returns are possible. 

 

Here is last years' for comparison http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdf

[ERICOPOLY]

 

"http://online.wsj.com/article/SB10001424127887324595904578119140604024484.html"

FHA Nears Need for Taxpayer Funds

 

 

Would that mean an increase in litigation pressure, or incentive to settle sooner by all relevant parties, or incentive for some relevant parties to try and delay process.

 

Another link from the fantastic Calculated risk:

 

 

"it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.

emphasis added

 

Clearly Bernanke and the Fed are concerned that credit isn't flowing to a large segment of the population.

Read more at http://www.calculatedriskblog.com/2012/11/bernanke-suggests-mortgage-lending.html#RGA4sWgA1ibEA5Dd.99 "

 

To me it seems that when the fed clearly states that, it's a tipping point in favor of the banks. Have they stated anything similar before? If not, it's absolutely huge. Regulation might be loosened instead of tightened.

 

Just a random question regarding a scenario where corporate taxes get cut to 28% from 35%.

 

I assume most of the big US banks today are paying 35% tax on the net interest income from the next incremental mortgage loan that they extend.

 

So if that 35% were cut to 28%, the risk/reward of extending credit would in theory improve, right?  So they could afford to relax their lending standards and/or interest rates a bit, correct?  Or no?

[redskin]

The risk weighted assets have declined from Q3 2011 as well.  This would increase the potential capital return.

 

Well for kicks you could estimate how much capital BAC "could" return.  I think there are two constraints. 

1)  CCAR:  since CCAR is less severe than last year, and, BAC passed last year - they could return all the capital they generated from Q3 2011 - Q3 2012 and in theory would pass CCAR.  BAC has generated $20Bn of capital since Q3 2011, so this constraint says capital return <= $20Bn. 

 

2)  Basel 3:  Moynihan states that he wants to keep capital at 9%.  Since they are at that point today, whatever capital they generate Q4 2012 - Q4 2013 should also be returnable.  Analyst estimates are about $1 for next year, add say .25c for Q4 2012.  Multiply by 1.4x for the DTA multiplier and you get about $17.5Bn.

 

In other words, in theory, BAC can return $17.5Bn, and

-- in a severe recession maintain 5%+ Tier 1 capital through 2015 (CCAR constraint)

-- in the baseline case end 2013 with 9% Basel 3 Tier 1 capital (Moynihan constraint)

 

I'm probably being too aggressive, but I still think/hope we see $10-$15Bn returned next year.  Which itself is well above what any analysts say.  But that's what my understanding of the capital returns says.  We'll see. 

 

 

OK the stress tests are out, enjoy!

 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20121115a1.pdf

 

The important part are the various assumptions in the "severely adverse" scenario.  I'm comparing the worst assumption in 2012 stress tests to the worst assumptions in 2013's. 

 

2012 vs 2013

GDP -8.9% vs -6.1%

Housing bottom  108 vs 113

 

At least on these two metrics, the stress test is less severe than last year, which in turn should mean higher capital returns are possible. 

 

Here is last years' for comparison http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdf

[mankap]

Now everybody will be waiting for March to see what kind of approval for dividend and buyback BAC can get.Barron says that BAS will benefit from the less stringent conditions for stress tests.The

 

 

Winners and Losers in the New Bank Stress Tests; Why Citi is Falling

The Federal Reserve released the guidelines for its 2013 stress tests for financial companies on Thursday, and the new scenarios could benefit some banks over others. The good news, according to analysts at KBW, is that the stress tests that will be used to determine whether banks can raise dividend or buy back shares appear to be less severe than they were last year.

 

“Overall, we believe that all banks should benefit as the up-front stress appears to be lower in the 2013 CCAR compared to last year,” the analysts wrote.

 

But the tests appear to put more pressure on banks with wide international exposure.

 

“Domestically, the trough in each component of the scenario is less severe but the recovery from the trough is longer (i.e., a shallower but longer recession). Internationally, the scenario is more severe for all regions, so banks with greater exposure outside the U.S. likely benefit less.”

 

Of the major U.S. banks, KBW thinks Morgan Stanley (MS), Goldman Sachs (GS) and Bank of America (BAC) are in the best position, because they have less international exposure

 

“Card-focused banks (American Express (AXP), Capital One (COF), and Discover Fincnial Services (DFS)) should benefit as well since the peak unemployment rate is lower for the 2013 CCAR and the recession assumptions are less severe.

 

But there are also financial companies that could be in a bind because of th enew rules.In particular, as the Huffington Post’s Mark Gongloff points out, the new rules make banks prove they can handle a downturn in Asia, which puts particular pressure on Citigroup ©. That may be why Citi is selling off today, while most othe rbank stocks have recovered from intial losses to trade in positive territory.

[obtuse_investor]

Now everybody will be waiting for March to see what kind of approval for dividend and buyback BAC can get.Barron says that BAS will benefit from the less stringent conditions for stress tests....

 

I expect that the market will start pricing this in quite soon.

[ERICOPOLY]

Go directly to BAC's Investor page and look up presentations.  That link wasn't working for me either, but when I went to their website myself, it worked after registering.  Cheers!

 

The other thing I found in that webcast is Moynihan directly stated that he thinks they will earn 13%,14%,15% returns on tangible equity.

 

Tangible equity being $13.50 today, and already at 9% B3 including a 50 bps buffer, this would indicate typical earnings of between $1.75 - $2.025 per share.

 

[ERICOPOLY]

So if you pay $9 for the stock, that's a 14.8% payout growing at 5% per annum if you use his projection of 1/3 of earnings is retained and we get a 15% return on tangible equity.

 

The "payout" I mention is not a dividend yield -- it's the combination of dividends and buybacks (you can choose to sell an offsetting amount of shares to their buyback in order to get a cash payout).

[xazp]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

Go directly to BAC's Investor page and look up presentations.  That link wasn't working for me either, but when I went to their website myself, it worked after registering.  Cheers!

 

The other thing I found in that webcast is Moynihan directly stated that he thinks they will earn 13%,14%,15% returns on tangible equity.

 

Tangible equity being $13.50 today, and already at 9% B3 including a 50 bps buffer, this would indicate typical earnings of between $1.75 - $2.025 per share.

[ERICOPOLY]

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

Go directly to BAC's Investor page and look up presentations.  That link wasn't working for me either, but when I went to their website myself, it worked after registering.  Cheers!

 

The other thing I found in that webcast is Moynihan directly stated that he thinks they will earn 13%,14%,15% returns on tangible equity.

 

Tangible equity being $13.50 today, and already at 9% B3 including a 50 bps buffer, this would indicate typical earnings of between $1.75 - $2.025 per share.

 

I need to watch the webcast again, but I believe that Moynihan was talking about 13%,14%,15% returns on tangible equity after the planned expense reductions and LAS expense runoff.

 

So they'd be doing better than that if interest rates get more favorable.

[redskin]

Share buybacks are critical for the warrants.  If they are earning 20-30 Billion (1%+ ROA) and also repurchase a significant amount of shares the warrants will look good.  $20 billion with 7 billion shares out looks a lot better than 10.5 billion.

So the roughly $2/share in earnings also jives with their overview on normalized PTPP analysis. 

 

But my question for the board is, if BAC trades at a 10x multiple, that's a $20 share price, then why the interest in the warrants? 

 

Go directly to BAC's Investor page and look up presentations.  That link wasn't working for me either, but when I went to their website myself, it worked after registering.  Cheers!

 

The other thing I found in that webcast is Moynihan directly stated that he thinks they will earn 13%,14%,15% returns on tangible equity.

 

Tangible equity being $13.50 today, and already at 9% B3 including a 50 bps buffer, this would indicate typical earnings of between $1.75 - $2.025 per share.

[redskin]

Where did you see Moynihan mention 1/3 buybacks, 1/3 dividends, 1/3 retained?  I don't recall reading/hearing this.

So if you pay $9 for the stock, that's a 14.8% payout growing at 5% per annum if you use his projection of 1/3 of earnings is retained and we get a 15% return on tangible equity.

 

The "payout" I mention is not a dividend yield -- it's the combination of dividends and buybacks (you can choose to sell an offsetting amount of shares to their buyback in order to get a cash payout).