Author Topic: BAC-WT - Bank of America Warrants  (Read 1909034 times)

onyx1

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Re: BAC-WT - Bank of America Warrants
« Reply #7220 on: April 16, 2018, 01:08:30 PM »

Analyst:
"In terms of expenses, Paul and Brian, you've -- you're on track clearly to get to your target of the ballpark
$53 billion for this year. I think you've said that you can also kind of stay in that ballpark in 2019 and
2020, even with the investments and the build-outs that you're doing. Is that still the view? And how is
that possible? Are you self-funding that with some saves elsewhere? If you could talk about that, it would
be helpful."

Brian Moynihan:
"Yes, John, it's our view, what we said, I think, last quarter, the investments we'll make are -- will be
funded with the hard work in operating leverage and Simplify and Improve and organizational health and
operational excellence. And we announced the investments we're making in the retail business. It's all
contemplated with -- in the low $53 billion level, which we ought to be able to maintain in '19 and '20. And
if we're going to make any further investments, it'll be modest, as we said. But right now, it looks like it's
shaking out to be okay."

Loved this exchange.  0% expense growth and 5% core loan growth (for two years!) is a lot of operating leverage.


Viking

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Re: BAC-WT - Bank of America Warrants
« Reply #7221 on: April 16, 2018, 02:33:16 PM »
Mrazul, thanks for the clarity. Do you know if there has been a reporting change for Q1 for the banks on this topic?

Onyx1, yes, that exchange (expenses remaining at $53 billion through 2020)  is music to existing shareholders ears. I think general investors are missing the size of the cost savings that technology and the move to mobile banking is starting to provide the big banks. This will be another lever to allow them to deliver growing profitability. Economy of scale has to matter when it comes to winning in digital and it takes many years to execute. BAC looks very well positioned.

marazul

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Re: BAC-WT - Bank of America Warrants
« Reply #7222 on: April 16, 2018, 02:46:56 PM »
Viking, there has been an accounting change. Now financial institutions that hold assets without fixed payouts and maturities (i.e. equities) are forced to mark to market these assets and the delta in price between quarters goes through the p&l...used to be that these assets could be held to maturity and they wouldn´t be marked to market, wouldn´t affect book value of equity and wouldn´t go through the p&l...that changed starting January 2018...For bonds, they just have to be marked to market, but changes in price don´t flow through the p&l...so nothing changes here...Most of the securities portfolio of banks is short term investment grade bonds, so no major impact here...People are worried now because we have experienced many years of TBV per share growth as rates kept falling and banks bought stock at very low multiples, thas is no longer the case...but the reality is that none of these changes impacts the real value of banks, it´s just accounting...US banks are doing just fine

Cigarbutt

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Re: BAC-WT - Bank of America Warrants
« Reply #7223 on: April 16, 2018, 04:29:18 PM »
I think general investors are missing the size of the cost savings that technology and the move to mobile banking is starting to provide the big banks. This will be another lever to allow them to deliver growing profitability. Economy of scale has to matter when it comes to winning in digital and it takes many years to execute.


Disclosure:
-Fascinated by the banking industry but not invested now (for a variety of reasons).
-I accept that bank stocks may do well.

Polite question:

If you assume that information technology has and will increase "productivity" of banking, then why has the share of compensation to the finance industry to GDP ratio has risen significantly since the mid 1990's?

I'm asking because, in another life, when was making decisions on the relevance of introducing information technology projects, the goal was to lower cost and/or to increase revenue at the expense of a competitor.

The question is about sustainability of part of the moat that has characterized the banking industry. Maybe, I'm missing something.

Viking

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Re: BAC-WT - Bank of America Warrants
« Reply #7224 on: April 16, 2018, 07:15:02 PM »

Polite question: If you assume that information technology has and will increase "productivity" of banking, then why has the share of compensation to the finance industry to GDP ratio has risen significantly since the mid 1990's?


Cigarbutt, i have not looked in detail but my guess is compensation expense at BAC has come down significantly over the past 5 years. There was a short term spike as the big banks hired people to comply with all the new regulations. All the big banks have been aggressively cutting compensation expense the past few years and they all will be growing top line much faster than bottom line expenses in the coming years. (The exception is WFC who is having to ramp up expenses to comply with all the orders they are getting from the Fed.) So I would expect the ratio you reference above to be coming down and to continue lower in the coming years.

I look at what it costs me to manage my investments versus 10 years ago and it is significantly less. I used to pay $300 and more to simply execute a trade. Now it costs me $10. I can now hold assets in US dollar accounts and this greatly reduced the need to convert currencies which was very expensive (just need RBC to add the feature to RESP). And when I do convert currency the fees today are much lower than in the past. Given the size of my portfolio, I pay no fees when I pull $ out of one of my accounts. I also have access to high quality research. I also have a no fee checking account (do not pay for cheques, am allowed electronic transfers). The finance industry is making way less $ off of me and my family than they did 10 years ago. :-)

Viking

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Re: BAC-WT - Bank of America Warrants
« Reply #7225 on: April 17, 2018, 03:54:58 PM »
Now that earnings have been released we can start to think about CCAR and capital return which will be announced in late June. We will find out what  the new dividend payout will be and also the total amount for share repurchases. It really is amazing how far BAC has come in the past 24 months. What is possible/likely for BAC?

Analysts expect BAC to earn about $26 billion in 2018 = $2.55/share ($27.5 before paying preferred dividends of $1.5 billion). I think it is possible they will be approved to return $26 billion total (July to June).

Possible Dividend = $0.22/quarter = 2.9% yield = $2.2 billion per quarter = $8.8 billion per year
Payout ratio $0.88/$2.55 = 35% which is in line with Moynihan’s previous communication

Possible Buybacks = $26 - $8.8 = $17.2 billion / $34 per share (avg cost?) = 505 million shares
- after stock awards, expect share count to fall 4.5%

This would give investors 3% dividend plus 4.5% net stock repurchases = 7.5% total return
Top line will still be growing and total profits will also continue to grow.

Total capital return history:
2018 = $26? Billion = $8.8 billion in dividends and $17.2 billion in share repurchases
2017 = $16.8 billion = $4 billion in dividends and $12.8 billion in share repurchases
2016 = $7.6 billion = $2.5 billion in dividends and $5.1 billion in share repurchases

Dividend increase history:
July 2018 = $0.22?
July 2017 = $0.12
July 2016 = $0.075

Year end share count:
March 31 2018 = 10,176, 111 lower than Dec 31, 2017
2017 = 10,287 (includes 700 million addition in Aug 24 from BRK warrants), 465 lower than PY
2016 = 10,053, 328 lower than PY
- it looks to me like 85-90% of BAC share repurchases actually lower shares outstanding with about 10-15% offset as stock compensation.

At Dec 31, 2017 remaining stock repurchase authorization was $10.1 billion.
In Q1 2018, BAC returned $6.1 billion total to shareholders (dividends and repurchases)

Warrants still outstanding:
Oct 28 2018 = 122 million shares
Jan 16 2019 = 143 million shares
« Last Edit: April 17, 2018, 04:41:21 PM by Viking »

onyx1

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Re: BAC-WT - Bank of America Warrants
« Reply #7226 on: April 17, 2018, 05:53:37 PM »
Thanks for the post Viking. 

A few comments.

(1) BAC still has $19.4bln in DTA (net of allowances).  The 10-k doesn't offer enough information on how much or when these will be applied.  But I think it's safe to assume they will likely shelter some taxes this year resulting in a higher capital return amount than the $26bln for 2018.

(2) Based on recent comments, a 35% dividend payout looks optimistic.


Earnings call, January 17, 2018

Analyst
Okay. And then just last question on the dividend payout ratio. I realized that earnings is up with a lower tax rate. Do you expect you'll keep that dividend payout ratio flat? Or how are you thinking about the dividend and overall capital return?

Moynihan
We basically said we're moving towards a 30%-type payout ratio of earnings, and I think that would mathematically follow your -- what you just laid out. In fact, if tax earnings go up, it'd be a higher number. So -- but we're not quite there yet, but we're pushing that towards that direction.

Credit Suisse Conference presentation, February 13, 2018

Moynihan
Well, as you think -- if you look at last year with the extra $5 billion, which because of all the different demand that's happened, we pushed up the $17 billion, $18 billion -- $17 billion and change. And so you're right out there and if you annualize even the dividend for the second half. So we will push through. And so there's a lot of talk about this scenario. And the scenario is still to put you back -- essentially people said it's more severe, but you'd say take, of course, as we're getting -- the cycle is getting better and better. Unemployment is now 4. Last year, it was, I don't know, 4.5, whatever. You still view the endpoint as being a real member, not a relative number. So 500 basis point increase from 5 to 10 will be -- you still leave at 10 because that's the marker. And so that wasn't as unexpected in my mind. It's counter -- it's not. Otherwise, it'd be too procyclical. As the cycle improves, you keep bringing in the 500 basis point change, it'll be a less and less number. So we've erased that. We had $20 billion excess last year. Our risk is down. Our capital is up. The earnings power is up. The tax reform -- everybody's earnings power's up. So we'll push hard to get as much out as we can. It's the #1 issue for the company, to get the capital, because you can't do acquisitions. What is the use of capital acquisition? You need it for organic growth and then you return it to the shareholders. We're not doing any acquisitions. We don't need it for organic growth. And the reality is that we -- even with the loan growth we have in the business line, the net loan growth still doesn't stop the current capital base. And so therefore, we got $70 billion -- $60 billion, $70 billion of loans to still run off that we could replace with good loans. And then even within the good loans, we got a lot of loans like mortgage loans and stuff that we would make a different decision on if we actually needed capacity. So we've got tremendous capacity to support the customers. And so the real question is how do we return it? 30% dividends, 70% buybacks? And, we'll push through -- we'll push as hard as we can and push it north of where it is today.

Analyst
So where your stock is today, I would argue it's still relatively inexpensive. You said 30% dividend. As a G-SIB, are you feeling that not only the language and the instructions, but the tone of the Fed would keep you at that -- when you get to 30%, keeps you at that 30%?

Moynihan
I think the reality is if you go back and sort of study how do you never have to cut the dividend -- which is the goal of everybody -- those kinds of goals are sort of -- lead to this conclusion I talked about beginning 6 years ago or something. And I just believe that, that is a responsible place to be, whether it's a little higher, a little lower in a given day. But principally, and I think, with the amount of capital we have and multiples that the marker will put on the earnings, I think we'll always see good dynamics and the stock's always cheap in our minds.

It's not clear here, but it appears to me that the most we can expect in June is 30%, or $0.19/quarter.  Obviously, I'd be very happy if I'm wrong and you are right.
« Last Edit: April 17, 2018, 05:56:22 PM by onyx1 »

John Hjorth

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Re: BAC-WT - Bank of America Warrants
« Reply #7227 on: April 17, 2018, 09:20:35 PM »
Thank you for some awesome posts lately about BAC in this topic, gents,

I was absolutely stunned by the 2018Q1 performance reported by BAC monday this week - absolutely speachless, when I clicked my way into the reporting, based on a received notification by e-mail.

Just a few thoughts shared here, trying to add to the idea as is right now.

  • Share buy backs: Joel [Racemize] has posted before about the math involved in these calculations. [I think it was in the C topic, not sure right now though.] I've been struggling with this, trying to model it in Excel as some kind of approximation - so far with no success, based on desk testing. I've come to the conclusion, that it must be integral calculus - a math excersise, that I haven't maintained during now about 40 years. It's just dead & non-existing inside my head. However, I don't give up here. I still have good contacts at University of Southern Denmark here in Odense, and I'm willing to use it here, for the purpose of helping us all here on CoBF. [It's about the average repurchase price per share under the share buybacks going on now and going forward, under certain conditions, in the last post by Viking in this topic indicated as "33 (?)"[<- please, take no offense here, Viking - I really appreciate all your posts about the big four US banks here on CoBF!]
  • Share buybacks vs. expansion of business volume: Please think of a US infrastructure program here. We are talking about a lot of USD Bs here. I will personally gladly let a part [or all of it] of the BAC share buy back program go for reasonable growth in business volume, [if needed], based on a US infrastructure reform. Let's just see how it will play out going forward.
  • Relation to FED and other regulative bodies: The environment is changing - fast - at least with regard to sentiment and perception among the involved parties. The banks are now pushing hard for a material change. Please read the shareholder letter by Mr. Dimon for JPM released some days ago, and you'll find this in it:There will be NO help from the banks, next time hell visits Earth again at some time in future. Because the banks have been punished for doing that under the GFC. - What a hardliner message! - implying: "Next time, fix it yourself, please!" - The balance of power is to me actually shifting.
  • Operational focus: It's been keeping the nose in the track for years now, to get things turned around. Every shareholder letter from the big four US banks CEOs are about it. To just get better, and never to have a repetition of what happened nine years ago. It saturates all I have read recently.
  • <edit>New FED boss Jerome Powell:To me, he is good for all of us. Absolutely clear in the spit. No promises, just data driven, flexible decision making going forward with regard to interest rates. We also have to remember, that the expected interest rate hikes going forward are - gradually - moving the US economy out of "unknown territory".</edit>
« Last Edit: April 17, 2018, 09:56:59 PM by John Hjorth »
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Viking

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Re: BAC-WT - Bank of America Warrants
« Reply #7228 on: April 17, 2018, 10:55:35 PM »
Onyx1, I am more comfortable with $26 billion as a target total payout and less confident in the split between dividend and share repurchase. Thanks for posting the quotes.  I think the Fed is less concerned about size of dividend and I wonder if banks will get a little more aggressive this year with the dividend and target a 3% yield (especially with bond yields moving higher). I also have read that all the big banks feel the stress test is more severe this year and I have this as a risk for lower awarded payouts.

John, I started at $33 as a best guess as to an average cost for shares starting in July 2018 to June 2019. In an edit I then moved to $34 as I do expect the shares to move higher later in the year. I think this will also be too low. The big benefit of shares trading lower is BAC will be able to buy back more. :-)

racemize

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Re: BAC-WT - Bank of America Warrants
« Reply #7229 on: April 18, 2018, 07:10:36 AM »
Adding in on the buybacks John, all I'm doing with my spreadsheets is assuming that the average buyback happens at a certain P/E based on the prior year's earnings, and then I change the P/E to see how the results change.  We don't have enough sig figs to pull out the precise buyback effects, so I go the easy route!