txlaw Posted January 20, 2012 Share Posted January 20, 2012 I find it absolutely wild that so many people want BAC to pay dividends and buyback shares here. Not too long ago they were giving Buffett incredible terms just so they could raise $5 billion and instill market confidence. BAC isn't selling at half TBV because they are slow to pay out cash to shareholders. They are selling at such a discount because the market doubts their balance sheet and solvency, or liquidity, going forward. Building up capital addresses the doubts and will eventually take away the market's reason for putting a discount on the stock. This will get the stock to IV much faster than dividends. I actually don't get the sense that most people want BAC to pay dividends and buyback shares just yet. But you're exactly right -- lifting the clouds of doubt by continuing to generate capital will definitely get BAC back up to IV way faster. I would say that the only big banks right now that should be buying back stock or paying out dividends are WFC or USB. Maybe PNC, but that's debatable given the lack of clarity regarding their recent M&A activity. Link to comment Share on other sites More sharing options...
Guest Hester Posted January 20, 2012 Share Posted January 20, 2012 I actually don't get the sense that most people want BAC to pay dividends and buyback shares just yet. I agree, most people (aka the market) want them to build capital. I was just writing about people on the board and this thread. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 Timing is key. Getting the stock to double as soon as possible so at least a portion of the gains can be sold and parlayed (hopefully) into the next double. March: Stress test results -- makes it clear to the world that another 20% real estate decline and huge jump in unemployment won't sink them April: Q1 Earnings July: Q2 Earnings By this time we should start to see a clear trend of improvement from "Project New BAC" $12 by then? They already reduced headcount by 7,000 in Q4'11. That's huge! Meanwhile if they can avoid another huge R&W reserve build they should be able to build 100bps of capital this year. Link to comment Share on other sites More sharing options...
bookie71 Posted January 20, 2012 Share Posted January 20, 2012 Are you sure we are at the bottom, it took about 15 years for Alaska to come back http://business.time.com/2011/08/01/bulldoze-the-new-way-to-foreclose/ Link to comment Share on other sites More sharing options...
txlaw Posted January 20, 2012 Share Posted January 20, 2012 I actually don't get the sense that most people want BAC to pay dividends and buyback shares just yet. I agree, most people (aka the market) want them to build capital. I was just writing about people on the board and this thread. Let me rephrase that. I actually don't think most people on the board want BAC to pay dividends and buyback shares just yet, especially given the reluctance to do so on the part of the other banks. I can only recall a couple of posts expressing that opinion. Link to comment Share on other sites More sharing options...
redskin Posted January 20, 2012 Share Posted January 20, 2012 I find it absolutely wild that so many people want BAC to pay dividends and buyback shares here. Not too long ago they were giving Buffett incredible terms just so they could raise $5 billion and instill market confidence. BAC isn't selling at half TBV because they are slow to pay out cash to shareholders. They are selling at such a discount because the market doubts their balance sheet and solvency, or liquidity, going forward. Building up capital addresses the doubts and will eventually take away the market's reason for putting a discount on the stock. This will get the stock to IV much faster than dividends. I actually don't get the sense that most people want BAC to pay dividends and buyback shares just yet. But you're exactly right -- lifting the clouds of doubt by continuing to generate capital will definitely get BAC back up to IV way faster. I would say that the only big banks right now that should be buying back stock or paying out dividends are WFC or USB. Maybe PNC, but that's debatable given the lack of clarity regarding their recent M&A activity. I don't want a dividend. I want them to take advantage of the doubt and buy back shares at these levels. Moynihan has said in the past that he plans to get back the shares that were issued during the crisis. It is a lot easier to do that when they are trading under 10 than 20+. I understand wanting to have a strong balance sheet to weather a storm, but I feel as if they have done that. They have charged off $100 billion of their worst loans over the past 4 years, set aside $15 billion for reps and warranty liability, raised legal reserves and set aside $34 billion for loan loss reserves. They have higher capital ratios than at any other point in history. They have $370 Billion of excess liquidity. Basel III requirements have to be implemented by 2019. They are saying they will be compliant by the end of this year. I am wondering if they got the heads up from regulators not to ask for divy or buyback. Frustrating to me. Look at where BAC was in 2007 on the eve of the crisis as compared to today.... 2007 Risk weighted assets 1,212,905 Total Loans 876,000 Total Common Equity 142,394 Tangible Common Equity 54B Loan Loss Reserves 11.5B Tier 1 Common Ratio 4.93% Tangible Common Equity ratio 3.46% Today Risk weighted assets 1,284,500 Total Loans 926,000 Total Common Equity 211,704 Tangible Common Equity 133B Loan Loss Reserves 34B Tier 1 Common Ratio 9.86% Tangible Common Equity ratio 6.64% Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 I am wondering if they got the heads up from regulators not to ask for divy or buyback. Frustrating to me. I believe they got the heads up from regulators that you'd better raise capital quick or you'll fail our new stress test. So in a few months time they raise $5b from Buffett, sell 400m into the market, and accelerate their asset sales. This is why they went all crazy all of a sudden after assuring us in July that they could continue on their path without dilution. Just speculation, but I believe the Fed tipped off the banks a few months ahead of time. After all, the point of the stress tests is to restore market confidence in the banks, not make the banks fail and scare everyone. Link to comment Share on other sites More sharing options...
PlanMaestro Posted January 20, 2012 Share Posted January 20, 2012 After all, the point of the stress tests is to restore market confidence in the banks, not make the banks fail and scare everyone. Good point. At the same time, what that says about Citigroup that was authorized to pay a small dividend and has reversed their intention to sell some of their businesses? Link to comment Share on other sites More sharing options...
Aberhound Posted January 20, 2012 Share Posted January 20, 2012 BAC and MBI are both trading at a discount because of litigation uncertainty and in MBI's case because they cannot write new business. So BAC should use their position to find out what UBS and the other remaining banks in the MBI restructuring litigation want to settle. Then they should find out from Moody's what MBI would need post settlement to write AAA or AA etc.. Armed with the information BAC uses its capital to buy MBI, then after taking it private settle the now internal issues to put capital into MBI and privately resolve the mortgage liability issues. No more risk of fraud being proven in court. Meanwhile settle with UBS etc.. Then put any other capital in MBI needed to get AAA or AA and start writing business. Then float MBI on the market again at billions higher valuation or maybe Buffet changes his mind about the muni insurance and he buys it and he is the one who puts in the capital to get AAA. While they are at it they can secretly buy MBI shares until they hit the disclosure limits and enjoy a short squeeze. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 After all, the point of the stress tests is to restore market confidence in the banks, not make the banks fail and scare everyone. Good point. At the same time, what that says about Citigroup that was authorized to pay a small dividend and has reversed their intention to sell of their businesses? The worst parts of the stress test were the 20% decline in US real estate and the 13% unemployment. Citigroup got off really easy because they have the lightest US mortgage exposure and lightest US consumer credit exposure. They have Asian consumer exposure but under the stress test Asia still grows at like 4% or something. 4% growth is "stress". BofA's us mortgage on-balance-sheet exposure is more than 3.5x larger than Citi's. Link to comment Share on other sites More sharing options...
PlanMaestro Posted January 20, 2012 Share Posted January 20, 2012 BofA's us mortgage on-balance-sheet exposure is more than 3.5x larger than Citi's. and mortgages is still the most important stress ahead. I have both but Citi seems to be on the fast lane and also very cheap. Thanks Eric, love your comments. Link to comment Share on other sites More sharing options...
Uccmal Posted January 20, 2012 Share Posted January 20, 2012 Nice summary redskin, I am in the camp that says this baby is trading off of solvency concerns. I want all cash to go to ensuring a fortress balance sheet. The dividend can wait until the stock is back to thehigh teens. As for buybacks, who cares? Growing earnings wo dilution will be what counts a year from now. A month ago people were still predicting bankruptcy. As the stock rises this could very quickly become my largest position. Link to comment Share on other sites More sharing options...
Parsad Posted January 20, 2012 Share Posted January 20, 2012 BofA's us mortgage on-balance-sheet exposure is more than 3.5x larger than Citi's. and mortgages is still the most important stress ahead. I have both but Citi seems to be on the fast lane and also very cheap. Thanks Eric, love your comments. I would be careful with Citi. Their exposure to Asian markets may (probably) will come back to haunt them. We own only BAC and WFC. As mentioned, I'm more confident in U.S. banks and the financial system than any other part of the world at the moment...including Canada! Our bet is on the U.S. coming back, while the rest of the world struggles. Cheers! Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 BofA's us mortgage on-balance-sheet exposure is more than 3.5x larger than Citi's. and mortgages is still the most important stress ahead. I have both but Citi seems to be on the fast lane and also very cheap. Thanks Eric, love your comments. I would be careful with Citi. Their exposure to Asian markets may (probably) will come back to haunt them. We own only BAC and WFC. As mentioned, I'm more confident in U.S. banks and the financial system than any other part of the world at the moment...including Canada! Our bet is on the U.S. coming back, while the rest of the world struggles. Cheers! I unloaded my Citi to buy more BAC a couple of weeks ago. Even though I take on more concentration risk, I couldn't justify the opportunity cost (I think BAC has more upside). Link to comment Share on other sites More sharing options...
PlanMaestro Posted January 21, 2012 Share Posted January 21, 2012 I would be careful with Citi. Their exposure to Asian markets may (probably) will come back to haunt them. We own only BAC and WFC. As mentioned, I'm more confident in U.S. banks and the financial system than any other part of the world at the moment...including Canada! Our bet is on the U.S. coming back, while the rest of the world struggles. Cheers! Anything in particular that worries you Parsad? South Korea, Japan, Taiwan, Singapore, Australia, Hong Kong, India and Indonesia does not sound so bad and is well diversified. Australia I understand but is small and, with the exception of Hong Kong, my understanding is that the rest have flexible exchange rates, positive current accounts and large reserves. Also Citibank's capital ratios are not only by far the best of the Big 4 but also one of the best worldwide. Maybe because I am a Chilean living in Mexico I have a positive opinion of Citi's international exposure. I have even consider Santander as a potential future opportunity (not yet though) because of their large Latam presence. Link to comment Share on other sites More sharing options...
PlanMaestro Posted January 21, 2012 Share Posted January 21, 2012 Page 9 and 10, Citigroup's international retail consumer banking revenue per country and net promoter score http://www.citigroup.com/citi/fin/data/p111115a.pdf?ieNocache=166 Link to comment Share on other sites More sharing options...
twacowfca Posted January 21, 2012 Share Posted January 21, 2012 Given Warren's thoughts on housing it will surprise me if he hasn't been using the past few months to add to his $5b. He commented on how BAC reminds him of his glory years with AXP, and $5b isn't big for him given his stream of incoming cash. I mean, if he leaves this position untouched during a period where he bought $10b of IBM it will show tremendous discipline. Just since he committed the $5b in August it has already been replenished with what is pouring through the door. That's interesting. Another reason we bought BAC B warrants when we did was that the day after BAC closed below $5.00/SH, it got major price support from a major institution that put an ascending floor on the price. Almost all the spiky price movement for a few days afterward was on the upside with plateaus in between and almost no spiky minute by minute downward price movement. Link to comment Share on other sites More sharing options...
twacowfca Posted January 21, 2012 Share Posted January 21, 2012 I am wondering if they got the heads up from regulators not to ask for divy or buyback. Frustrating to me. I believe they got the heads up from regulators that you'd better raise capital quick or you'll fail our new stress test. So in a few months time they raise $5b from Buffett, sell 400m into the market, and accelerate their asset sales. This is why they went all crazy all of a sudden after assuring us in July that they could continue on their path without dilution. Just speculation, but I believe the Fed tipped off the banks a few months ahead of time. After all, the point of the stress tests is to restore market confidence in the banks, not make the banks fail and scare everyone. Yup. :) Link to comment Share on other sites More sharing options...
twacowfca Posted January 21, 2012 Share Posted January 21, 2012 BAC and MBI are both trading at a discount because of litigation uncertainty and in MBI's case because they cannot write new business. So BAC should use their position to find out what UBS and the other remaining banks in the MBI restructuring litigation want to settle. Then they should find out from Moody's what MBI would need post settlement to write AAA or AA etc.. Armed with the information BAC uses its capital to buy MBI, then after taking it private settle the now internal issues to put capital into MBI and privately resolve the mortgage liability issues. No more risk of fraud being proven in court. Meanwhile settle with UBS etc.. Then put any other capital in MBI needed to get AAA or AA and start writing business. Then float MBI on the market again at billions higher valuation or maybe Buffet changes his mind about the muni insurance and he buys it and he is the one who puts in the capital to get AAA. While they are at it they can secretly buy MBI shares until they hit the disclosure limits and enjoy a short squeeze. Yeah. And then they can insure their own bad paper. :o Link to comment Share on other sites More sharing options...
alertmeipp Posted January 21, 2012 Share Posted January 21, 2012 Asian, at least in my generation, takes credit very seriously.. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 21, 2012 Share Posted January 21, 2012 Given Warren's thoughts on housing it will surprise me if he hasn't been using the past few months to add to his $5b. He commented on how BAC reminds him of his glory years with AXP, and $5b isn't big for him given his stream of incoming cash. I mean, if he leaves this position untouched during a period where he bought $10b of IBM it will show tremendous discipline. Just since he committed the $5b in August it has already been replenished with what is pouring through the door. That's interesting. Another reason we bought BAC B warrants when we did was that the day after BAC closed below $5.00/SH, it got major price support from a major institution that put an ascending floor on the price. Almost all the spiky price movement for a few days afterward was on the upside with plateaus in between and almost no spiky minute by minute downward price movement. The terms of the $5b deal he struck in August allows him to purchase an ownership stake of up to 15% of BAC. So whether it was his idea to give him that much room to operate or the banks', I have no idea. Anyhow I believe the warrants count toward his 15%. So I guess in the low $5-$6 per share range he could only pick up another $4-$5b worth of shares or so as his warrants are already about 7% ownership. That would be his maximum fill unless he got more approval from the bank. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 21, 2012 Share Posted January 21, 2012 Asian, at least in my generation, takes credit very seriously.. Some of the regulations in those Asian countries are very conservative. Like in Korea 65% LTV is maximum allowed for mortgages. Think they are going to have any trouble with the Korean portfolio? I don't. They're not like here in the USA where we allow 100% (or more I think). We trust in "the free market", boy didn't we ever learn a lesson. Yet we still have nothing like Korea's law and probably never will. Link to comment Share on other sites More sharing options...
bmichaud Posted January 21, 2012 Share Posted January 21, 2012 I have looked at this thing time and time again, and still continue to struggle.... For 2011, PTPP income was $17 billion, and if you add back the $12 billion of cost savings Parsad and Eric refer to, "normalized" PTPP is around $29 billion. Are you guys modeling higher PTPP due to future revenue increases, or does BAC becoming "lean and mean" involve a lower revenue base? Loan loss provision seems about at normalized levels, $13.4 billion, so pre-tax income is $15.6 billion, and net income $10.1 billion assuming a 35% tax rate. Shares out as of FYE were 10.5 billion, so normalized EPS is $.96. Curious what type of normalized EPS figure board members are looking at.... Link to comment Share on other sites More sharing options...
Cardboard Posted January 21, 2012 Share Posted January 21, 2012 Bmichaud, $0.96 is exactly what I got as current "cleaned up" or adjusted EPS. Gives it a very poor ROE and ROA. However, fair value for that has to be close to $12 or right around tangible book value. It is a very conservative forecast and a significant discount to book to account for these poor returns and no growth. Still lots of upside potential from that $12 if things get better. While I still have my concerns about sovereign debt loads, the returns here just seem too good to pass up. Not seen that very often with mega caps. Cardboard Link to comment Share on other sites More sharing options...
racemize Posted January 21, 2012 Share Posted January 21, 2012 Adding on to what Cardboard said, with a more "normal" economic environment and ROA/ROE, earnings power should be much higher than the .97 cents. That said, it will probably take a while for all of that to come through. Link to comment Share on other sites More sharing options...
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