BAC-WT - Bank of America Warrants

[ValueBuff]

I know I have seen some ideas regarding these.  I figured I would create the thread here.

The warrant that is most interesting to me is BAC.  The reason is the strike price adjustment for any dividend paid over 0.01$ per share.  At some point, the major US bank will start to repay shareholders.  Either by dividends (falling strike price on warrant) or buybacks (increase EPS) the BAC warrant offer the best bang as it is the only one that is adjusted downwards after 1 cent.

Thoughts?

[Ballinvarosig Investors]

Am I the only one who is scared by a Texas Ratio of over 100%?

[Rabbitisrich]

Are you talking about BAC? According to the last 10-Q, they have a Texas ratio of 21%

[SmallCap]

Excuse my ignorance but what do you mean by a Texas ratio?

[biaggio]

Excuse my ignorance but what do you mean by a Texas ratio?

I did not know either, but thanks to google search:

The Texas ratio is a measure of a bank's credit troubles. Developed by Gerard Cassidy and others at RBC Capital Markets, it is calculated by dividing the value of the lender's non-performing assets (Non performing loans + Real Estate Owned) by the sum of its tangible common equity capital and loan loss reserves.
In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.

[SmallCap]

Thanks, that helps a lot.

[Uccmal]

I have looked at and own the warrants for BAC and WFC.  I have reviewed the prospecti for each of these companies.  I haven't looked further into warrants from other US banks.  Part of the reason for this is that I have followed both companies since at least the credit crisis and have used their stores everywhere over the years.

The warrants allow me to buy BAC at 13.30.  So for an average of about $6.50 so far I get to buy BAC some time by January 2019 for 13.30.  Right now the break even price would be 13.30 + 6.50 = 19.80.  I would recoup some money with the stock price somewhere between $14.00 and the 19.80. 

Here are the problems I see with investing in BAC, warrants or common:
1) It is not really clear, and in fact, nearly incomprehensible, as to what may still be lurking on their balance sheet.
2) The stock could implode due to bad banking practices as in observation 1)
3) The bank could be forced into asset sales to bolster its balance sheet at some point in the future reducing its book value.
4) Regulation could wipe out profitability for years going forward. 
5) As per number 1 - BV could be vastly inflated due to toxic waste on the balance sheet.

[Uccmal]

The flip side of the negative outlook is the following:

1) Most of what is dangerous on BACs balance sheet is probably well known and visible now. 
2) BAC was a go to bank for the US government when they needed someone to take Merril Lynch private
3) Their capital position appears strong at this point in time and their operating earnings appear to be improving. 
4) They are already taking write downs related to regulatory changes with regards to fee income. 
5) Regulation will have some short term effect on profitability but I am quite confident that the big banks will find ways to make money hitherto unknown.
6) Mortage securities - someone mentioned on the other thread that we are now fighting the last battle.  I tend to agree.  There is little chance of BAC losing 50B on a re-buy scenario. 

So looking at the stock and the warrants.  A return to book value, assumming some percentage of impairment brings the stock price today up to say $17.  Growth of 10% average in earnings over the next 9 years brings me to a price of $34.00.  That brings the price of my warrants in 9 years to about $20.00.  6.50 to $20.00 in 9 years is not a bad return.  Should they increase the dividend at all along the way then my returns will be greater than that.  On a conservative basis I estimate that the returns on the warrants should be 15% per year or greater. 

[Bronco]

Uccmal - not saying either way, but I believe BAC trades 2013 leaps.  Has anyone here analyzed the near the money leap calls as a better % gainer play?

-Dan

[Ravi]

Did you think about the repurchase risk of buying back of the bad loans they originated including from country wide from Fannie/Freddie and other investors. This is a serious risk as some other lenders are already purchasing back.