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BAC Earnings


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Guest misterstockwell

I have no position, but Doug Kass sees things differently

 

 

A combination of non-recurring items suggest that BAC's core results were in the red, far from the $0.15 a share reported.

 

Indeed, including a reserve release of 7 cents on top of other non-recurring factors (securities gains, etc.) it suggests that the company, on a recurring basis, had a loss of about 10 cents a share.

 

Revenues were light. Iinvestment banking and equity activity were especially weak.

 

Tangible book value per share dropped from $13.22 to $12.92.

 

So far, in premarket trading, the market is forgiving as the shares are trading up by 44 cents from last night's close.

 

I took a short rental at $7.22.

 

 

Position: Short BAC

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Room for improvement of course, but I like the trend in all departments.  Primarily stabilization in real estate loan losses and provisions, and overall their loan loss provisions are showing nice drops.  We still have to see the impact from the $5B in operating costs that will be eliminated over the next couple of years...this thing is going to get lean and mean. 

 

I still see it hitting tangible common equity per share sometime in 2012...so the $12+ range per share.  Based on their legacy loan portfolio, I would prefer if they used capital to increase Tier 1 common equity further, rather than distribute it in dividends.  Some cash spent on share buybacks would be fine with me.  Cheers!   

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Reserve releases are a non-recurring factor (however of course the elevated level of loan losses will never end).

 

Most of the gains are one-time in nature (however of course all of the litigation, R&W, and mortgage losses are perpetual).

 

;D ;D

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I think it will be difficult for the regulators to deny BAC a dividend increase and share buybacks.  BAC's capital ratios are better than what JPM's were at this time last year.  JPM was given the ok for a divy and $9B share buyback.  BAC could buy back 10% of their shares with a $9B buyback.  I guess the regulators could be reluctant to give BAC the ok due to the litigation issues if they are not satisfied with their legal reserves.

 

12/2010 JPM

Tier 1 Common 9.80

Tangible Common 5.59

 

12/2011 BAC

Tier 1 Common 9.86

Tangible Common 6.64

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I think it will be difficult for the regulators to deny BAC a dividend increase and share buybacks.  BAC's capital ratios are better than what JPM's were at this time last year.  JPM was given the ok for a divy and $9B share buyback.  BAC could buy back 10% of their shares with a $9B buyback.  I guess the regulators could be reluctant to give BAC the ok due to the litigation issues if they are not satisfied with their legal reserves.

 

12/2010 JPM

Tier 1 Common 9.80

Tangible Common 5.59

 

12/2011 BAC

Tier 1 Common 9.86

Tangible Common 6.64

 

 

They stated today that they have asked for neither a dividend nor a buyback.

 

There is even talk of issuing $1b worth of shares to employees (in lieu of cash compensation) in order to build capital.

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This exchange on the conference call today is interesting.  Moynihan suggesting that in 8 quarters time the legacy asset servicing expenses could drop by $1.7b per quarter.  So that's a savings of $6.8b annually. 

 

Add on top of that the expected $5b in cost savings from "New BAC" progress and just those two items save $11.8b annually.

 

 

Edward Najarian - ISI Group: You talked about the LAS costs coming down, you know, when you broke $3.5 billion down into sort of $1.5 billion of litigation in $2 billion core. Can you give us any sense of what you think, sort of a long-term run-rate or a normalized level is for that $2 billion core? I know you're probably reluctant to talk about the timing of getting there, but when you do get there, maybe even few years away, what would be the right number to think about that $2 billion going to?

 

Brian T. Moynihan - CEO: I think Ed, to frame that, I think about the 60 plus delinquent units and the progress we made this year and then progress we ultimately got to get to, to get to a normalized level that will take the next six to eight quarters to get through that. But when you get down to that level, the number should be more in the $300 million a quarter versus a $2 billion from the operating cost side. And so, a reasonable amount, the servicers loans even under the heightened servicing duties that will be embedded in a way you service delinquent loans going forward to that kind of number. I just again say it's going to take us time to work through that. You see the progress we've made this year, you see the flows coming in slowing because on a whole servicing portfolio and in terms of improving delinquency, and then moving the stuff through the process. So I think that's what you should be looking for, from $2 billion down to maybe $300 million a quarter type of number.

 

 

EDIT:  Or are those cost cuts not mutually exclusive?

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I think it will be difficult for the regulators to deny BAC a dividend increase and share buybacks.  BAC's capital ratios are better than what JPM's were at this time last year.  JPM was given the ok for a divy and $9B share buyback.  BAC could buy back 10% of their shares with a $9B buyback.  I guess the regulators could be reluctant to give BAC the ok due to the litigation issues if they are not satisfied with their legal reserves.

 

12/2010 JPM

Tier 1 Common 9.80

Tangible Common 5.59

 

12/2011 BAC

Tier 1 Common 9.86

Tangible Common 6.64

 

 

They stated today that they have asked for neither a dividend nor a buyback.

 

There is even talk of issuing $1b worth of shares to employees (in lieu of cash compensation) in order to build capital.

 

That's good.  They still have some serious issues to work through.  We bought their B warrants when the stock was selling for about $5.17/ sh back in Dec on the theory that it would  be the type of situation that would bounce after all the pessimism, tax loss selling and portfolio cleansing ran its course, typically as it does in mid Dec. when a company is hated and down a lot nearing EOY.  :)

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You are correct Eric.  They are mutually exclusive.  The $5B in cuts is coming from just normal operating cuts at various levels...nothing to do with the separate legacy costs associated with the loan portfolios.  The $11B number would be correct, and you should see cuts on both ends showing up quarter after quarter.  As I said...lean and mean! 

 

You will have a business focused solely on core banking, running efficiently, with a solid balance sheet and a constantly improving loan portfolio.  They'll be smaller than JPM and WFC long-term, but run as efficiently and as strong...if not stronger.  This will be one of the greatest turnarounds in the financial industry once Moynihan is done...he managed to save the Titantic!  Cheers!

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So if you fast forward 2 years and realize those cost savings, we start at $11.8b additional pre-tax income relative to this year.

 

Strip out $15b worth of 2011 R&W provisions and we're at $27b extra pre-tax income relative to this year.

 

$27b is what it takes to boost their Basel III capital ratio by 150 bps annually (until they use up the tax losses).

 

And this $27b figure doesn't even include any other improvements (such as reduced loan losses or decline in legal expenses).

 

 

 

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So if you fast forward 2 years and realize those cost savings, we start at $11.8b additional pre-tax income relative to this year.

 

Strip out $15b worth of 2011 R&W provisions and we're at $27b extra pre-tax income relative to this year.

 

$27b is what it takes to boost their Basel III capital ratio by 150 bps annually (until they use up the tax losses).

 

And this $27b figure doesn't even include any other improvements (such as reduced loan losses or decline in legal expenses).

 

Yup!  And existing cash flows are already enough to cover legal expenses and legacy loan losses.  They've reduced exposure to Europe...so really their business will be determined by how the U.S. economy behaves and the housing market here.  Cheers!

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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.

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I think it will be difficult for the regulators to deny BAC a dividend increase and share buybacks.  BAC's capital ratios are better than what JPM's were at this time last year.  JPM was given the ok for a divy and $9B share buyback.  BAC could buy back 10% of their shares with a $9B buyback.  I guess the regulators could be reluctant to give BAC the ok due to the litigation issues if they are not satisfied with their legal reserves.

 

12/2010 JPM

Tier 1 Common 9.80

Tangible Common 5.59

 

12/2011 BAC

Tier 1 Common 9.86

Tangible Common 6.64

 

 

They stated today that they have asked for neither a dividend nor a buyback.

 

There is even talk of issuing $1b worth of shares to employees (in lieu of cash compensation) in order to build capital.

 

This is disappointing.  I understand building a fortress balance sheet and trying to meet the Basel III requirements as soon as possible, but they will not have another opportunity to buy back shares at these levels.  I wish they would try to balance both.  Huge missed opportunity in my opinion.

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I think building capital here make senses. They should build more than it's needed to bring the confidence back in the game. If it works out, it will be a home run either way.

 

I agree.  We all know what a fortress balance sheet means in business, and it certainly makes a difference in a leveraged business like banking when things get rocky.  When investors have no doubt about their capitalization, the stock will make its way above book like Wells Fargo.  Until then, it trades at a discount. 

 

Building a bank that customers know will be one of the last ones standing makes a big difference over the long-term.  They are half-way there now, where they are as well-capitalized as their peers, but taking that next step is where they need to go.  Cheers!

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I think it will be difficult for the regulators to deny BAC a dividend increase and share buybacks.  BAC's capital ratios are better than what JPM's were at this time last year.  JPM was given the ok for a divy and $9B share buyback.  BAC could buy back 10% of their shares with a $9B buyback.  I guess the regulators could be reluctant to give BAC the ok due to the litigation issues if they are not satisfied with their legal reserves.

 

12/2010 JPM

Tier 1 Common 9.80

Tangible Common 5.59

 

12/2011 BAC

Tier 1 Common 9.86

Tangible Common 6.64

 

 

They stated today that they have asked for neither a dividend nor a buyback.

 

There is even talk of issuing $1b worth of shares to employees (in lieu of cash compensation) in order to build capital.

 

This is disappointing.  I understand building a fortress balance sheet and trying to meet the Basel III requirements as soon as possible, but they will not have another opportunity to buy back shares at these levels.  I wish they would try to balance both.  Huge missed opportunity in my opinion.

 

Remember they just sold a few hundred million shares last month for less than $6.  They were not exactly acting like they are ready to return idle cash.

 

They say it was in order to retire some other things at a discount but that's pure BS.  It was because they are trying to race to get their capital ratios up.

 

The JP Morgan conference call indicated that there is a race to the top -- there were some comments made surrounding their wanting to get to fully phased in Basel III compliance sooner rather than later.  It seems this is what they see as the measuring stick that separates the men from the boys.

 

Then the Bank Of America release stated that they were "in line with peers" -- as if that's the end all and be all place to be.  So I guess maybe it is.

 

At least it's a lower risk strategy.

 

Well, if the company won't buy more shares on your behalf perhaps you should fork over some of your own money.

 

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The JP Morgan conference call indicated that there is a race to the top -- there were some comments made surrounding their wanting to get to fully phased in Basel III compliance sooner rather than later.  It seems this is what they see as the measuring stick that separates the men from the boys.

 

Then the Bank Of America release stated that they were "in line with peers" -- as if that's the end all and be all place to be.  So I guess maybe it is.

 

At least it's a lower risk strategy.

 

Well, if the company won't buy more shares on your behalf perhaps you should fork over some of your own money.

 

I think investors have to remember that things aren't completely rosy out there.  If you have a significant event occur, banks as very leveraged institutions would be vulnerable.  They could buy back shares with excess cash, but would that actually make the bank stronger and less impervious to such events?  The answer is obviously no. 

 

So they really need to get to a level of capitalization where there is tremendous strength in the balance sheet, and then they can explore buying back shares or paying a dividend.  But getting their capital ratios higher is the best thing to do.  I don't think they need to sell any more shares.  They could easily raise more cash by selling and then leasing back just their core offices in various cities, as well as selling other non-core businesses.  The announced cuts, drops in loan servicing, and existing cash flows will be enough to reach Basel III compliance in the time-frame they have.  Cheers!

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It does appear that there is a competition to get capital levels up quickly, no doubt caused in large part by the unwillingness to look undercapitalized relative to one's peers in the face of a European crisis.

 

My favorite CC exchange so far was this one:

 

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

 

Okay. So you would expect -- no, that's fine. Let me go to the capital question. Where are you leaning right now? Are you leaning toward having higher capital levels for a perception of greater stability of Goldman Sachs, or are you leaning toward, hey, let's buy back a lot more stocks because we're trading below book value?

 

David A. Viniar

 

You and I have talked a little bit about this before, Mike. It's a very hard question, and it's not a science. We sit here with our stock price where it is. And as I said to you, I am relatively certain that at some point in the future, we're going to wish we bought back a lot more stock at this price. Yet the flip side is it's a very tough environment, and in a tough environment, we tend to be very conservative and want to hoard cash and hoard capital. And so we make the -- those 2 things you mentioned are offsetting thoughts that we have, and we just try and make the best decision we can in the environment.

 

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

 

Well, if you feel a teeny bit better about Europe, would that mean you'd lean a little bit more toward buybacks?

 

David A. Viniar

 

I should emphasize teeny in how much better I feel.

 

 

I also liked this exchange on the WFC CC:

 

Nancy A. Bush - NAB Research, LLC, Research Division

 

John, I'd like to get your perspective on one other thing as well. Jamie Dimon said a few days ago that given the stringency of this stress test, the CCAR, the 13% unemployment, et cetera, et cetera. He expected after you get the results of that and he implied that he does not think there will be capital raising needed on the part of major American banks as a result. Do you hope that, that would be the definitive word on capital? Do you expect that -- do you have that same expectation?

 

John G. Stumpf

 

Well, I don't know other banks as well as he knows other banks. So I know this company. And we surely believe we're in a good spot. But I would make a general comment. What we've been through the last 3 years in the U.S., there's been a lot of capital grown, organically and just through earnings and a lot of capital was raised. The industry is far stronger than it's been in the past. And it takes strong banks and a strong financial system to support a growing economy. This country is in a much better position than a lot of our European counterparts because of the strength of the banks. So I don't know what the stress test is going to show for each institution. I don't have a vision of that. But I know in our case, I don't worry a lot about our capital to support growth in this for us.

 

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I like both those exchanges Txlaw, and I feel very much in line with what was said about buybacks/capital ratios and the general strength of U.S. banks.  I'm more comfortable owning U.S. banks presently, in particular large, national U.S. banks, than any other region in the world right now...more so than Canadian banks, more so than Asian banks and definitely more than European banks.  Cheers!

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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.

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