BAC- How much capital will Fed allow them to return?

[redskin]

I was looking through the results of the Fed's CCAR for BAC.  The Fed's stress scenario projected a 5.9% Tier 1 common ratio under severe adverse economic conditions.  The minimum required by the Fed was 5%.  These were based upon the banks 3rd quarter results of 2011.  At the time, BAC's Tier 1 common capital was $118 billion and risk weighted assets were $1,360 billion.  Through Q2 of 2012 BAC has Tier 1 Common of $134 billion and risk weighted assets of $1,193.

 

How much will the Fed allow them to return this go around?

 

If BAC had asked last year, I calculate they would've been allowed to return approximately $12 billion.  (5.9%-5= .9% X 1,360).  BAC has increased their Tier 1 Common by $16 billion since Q3 2011.  They have also reduced risk weighted assets by $167 billion.  Conservatively, if you use 5% for the reduced assets, they will need $8.35 billion less capital.  Adding all of these together gets you approximately $36 billion the Fed would allow them to return and still maintain the 5% Tier 1 Common ratio if a similar stress test is used. This is about 40% of their current market cap and they will be replenishing it every year as the legacy assets come off.

 

Of course BAC will be extremely conservative with what they ask for, but I would imagine they would request at least half of that amount.  They also have an additional quarter to build more capital.  Hopefully they will request most of it in share buybacks.

 

[ERICOPOLY]

Based on the Fed's past language, they will only let them return what they expect in earnings, minus some money set aside for building capital ratios.

 

So basically they won't allow the banks to get weaker (bias towards getting stronger), and will only object to returning all projected earnings if there is more work to be done.

 

I don't know how they agree on what "projected earnings" will be.  They are forward looking estimates.

[Uccmal]

An interesting exercise Redskin, thanks.

 

Based on what you guys are saying:

 

TTM earnings to Q2 are nearly 8 b.

 

It is not unreasonable to expect forward earnings from Q3 to be 20 B/yr.  This compares to WFC and JPM which are similar size.

 

They apply and receive permission to give back 5b, possibly 10'B

 

5 B is about 0.45 per share

10 B is 0.90 per share

 

Treated as dividends this would yield 5% to 10% dividend yield (9$ price per share).  The return would be greater if it was used as buybacks at below TBV.

 

Someone quoted Moynihan elsewhere as splitting this  between buybacks and dividends.  That still gives a dividend yield of 2.5. - 5 % for institutions that require dividends to invest, with the added bonus of buybacks.  They could retire 250 to 500 m shares per year as well which frees up more capital from dividend savings. 

 

I would suggest this is all very conservative, since the runoff of legacy assets, and the return to value of other legacy assets (witness Maiden Lane portfolios) allows reserves to be put into earnings.

[ERICOPOLY]

Government Forces Bailed-out Banks to Get BIGGER!  Fed reasons Bank of America just isn't big enough and taxpayers will be imperiled if this TBTF bank isn't forced to have an even larger balance sheet!  Oh, and by the way we also believe in ending too big to fail!

 

That's the implicit message if a 9% fully-phased-in Basel III bank can't return 100% of earnings.

[Parsad]

Government Forces Bailed-out Banks to Get BIGGER!  Fed reasons Bank of America just isn't big enough and taxpayers will be imperiled if this TBTF bank isn't forced to have an even larger balance sheet!  Oh, and by the way we also believe in ending too big to fail!

 

That's the implicit message if a 9% fully-phased-in Basel III bank can't return 100% of earnings.

 

Unfortunately, I think you are correct...that is the message, whether they want to convey it or not!  I think they'll be able to return the equivalent of about 50-60% of earnings because of the litigation and loan loss overhang.  Once they settle some more cases and housing is in full recovery, that will increase to 80-90% of earnings that could be returned as long as they maintain their fully-phased in Basel III status. 

 

As long as they stay under 80%-90% of book, I'm more than happy to see them buy back shares.  Or if they decide to go the 50/50 way of buybacks and dividends, I'm ok with that too.  At 90% of book or better, I would prefer if they returned far more in dividends than buybacks.  Cheers! 

[MVP444300]

Unfortunately, I think you are correct...that is the message, whether they want to convey it or not!  I think they'll be able to return the equivalent of about 50-60% of earnings because of the litigation and loan loss overhang.  Once they settle some more cases and housing is in full recovery, that will increase to 80-90% of earnings that could be returned as long as they maintain their fully-phased in Basel III status.

 

As long as they stay under 80%-90% of book, I'm more than happy to see them buy back shares.  Or if they decide to go the 50/50 way of buybacks and dividends, I'm ok with that too.  At 90% of book or better, I would prefer if they returned far more in dividends than buybacks.  Cheers! 

 

Sanjeev,  for clarification, by book value do you mean tangible bv or regular bv?

[Parsad]

Unfortunately, I think you are correct...that is the message, whether they want to convey it or not!  I think they'll be able to return the equivalent of about 50-60% of earnings because of the litigation and loan loss overhang.  Once they settle some more cases and housing is in full recovery, that will increase to 80-90% of earnings that could be returned as long as they maintain their fully-phased in Basel III status.

 

As long as they stay under 80%-90% of book, I'm more than happy to see them buy back shares.  Or if they decide to go the 50/50 way of buybacks and dividends, I'm ok with that too.  At 90% of book or better, I would prefer if they returned far more in dividends than buybacks.  Cheers! 

 

Sanjeev,  for clarification, by book value do you mean tangible bv or regular bv?

 

Of book.  As the company gets stronger and they run off litigation and losses, then book becomes a pretty good proxy for the value of the company.  Presently, I would prefer if they just bought at tangible book or less, but as the issues around the company disappear over the next few years, they could go up to 90% of book on buybacks.  But when the company gets up there, then I would prefer if they just started paying larger dividends, as many investors could then allocate it for better returns even after tax.  Cheers!