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For Dividend-Hungry Bank Investors, 3 Important "Stress Test" Developments


Parsad
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What do you think about the dividend that BAC will be proposing to Fed?

 

It will probably be around 5-7 cents a quarter.  Big jump, but only about 2-2.5% yield.  I would think they would try to buy back $3-5B of stock as well.  Cheers!

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What do you think about the dividend that BAC will be proposing to Fed?

 

It will probably be around 5-7 cents a quarter.  Big jump, but only about 2-2.5% yield.  I would think they would try to buy back $3-5B of stock as well.  Cheers!

 

Regarding that chatter from Moynihan today about only maintaining a 50 bps buffer over their Basel III required level....  does it change your assumptions at all?

 

He also said today that the purpose of that 50 bps buffer is so that they could handle a legal settlement without dipping below their required minimums.  So I presume from that he is saying that he doesn't first have to wait for the putback settlements to be resolved before he begins opening the spigot. 

 

They ended Q3 at 9%.  You've mentioned before that you're pretty confident they can generate another 50 bps ($7.5 billion) by end of Q1 if not end of Q4.

 

So if they are at 9.5% at the beginning of April when they pay that first dividend...

And if they can generate about $15 billion over the following 12 months (utilizing the DTA )...

 

That leaves about $22.5 billion that they can return over Q2,Q3,Q4,Q1 while still keeping their heads above their 9% mark. 

 

Then they have their ongoing asset sales, less whatever they have to burn through for legal settlements.

 

But then, the Fed is what the Fed does.

 

Your capital return estimate is far more generous than what I've seen suggested by the analysts.  What do I know?

 

 

EDIT:

22.5b

    6b  (subtract worst-case putback liability if that's a planned outcome over the time interval)

16.5b  capital return  (this still leaves a 7.5b, or 50 bps, buffer above their required minimums to settle other legal issues)

 

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We'll see what happens...  but here is what I think BAC wants to do.

 

1)  Last year the rumors were flying.  BAC's managment decides to race to full strength capital levels for a year to make a statement

2)  Goal met.  Confidence partially restored due to capital levels being ahead of peers.

3)  Restore more confidence.  Maximize the payout to project strength.

 

I don't think it will be helpful to only get approved for a dividend of just a few pennies.  They need to make a splash -- 10 cents a quarter.  You're telling everyone about your fortress, you must now walk the walk.  Don't limp around acting like you still need to build capital when you don't.

 

That's right about what they can afford at $15b return level if the Fed is limiting the dividend portion of the payout to 30%.

 

Yeah, I know the peers started small and it took several iterations to boost their payouts.  They were building capital at the same time.  BAC is already there -- skip the building capital part and go straight to full payout.

 

 

 

 

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Sorry, meant to post here...

 

I estimate BAC's earning power right now, after adding back FVA, DVA adjustments, etc., but before any cost savings, is about $12.2 billion pre-tax. Assuming a 35% tax rate and 11.5B fully diluted shares out, that's about $.69 per share. I don't see why a 50% dividend payout based on this figure isn't feasible, or roughly 8 cents per quarter. At $9.50 PPS, that's about a 3.6% yield - that would vault BAC from black-box turnaround to a quasi-regulated income generator. Anything over and above that from DTAs and cost savings, net of remaining R&W, could be used to repurchase shares.

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Your answering yourself Eric ;)

 

Conservatively:  say 15 Billion of unencumbered earnings 50/50 between share/debt buybacks and dividend * 60% payout gets me 5 Billion:

 

I say they start at 12 cents per share in April.  5% yld on present stock price, drops to 2.5 % yld with stock at 20.

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Sorry, meant to post here...

 

I estimate BAC's earning power right now, after adding back FVA, DVA adjustments, etc., but before any cost savings, is about $12.2 billion pre-tax.

 

That sounds right.  And then they expect to fully implement "NewBAC I" by end of Q3, giving them $2b of savings over Q4'13 and Q1'14.

 

That gets them to $14.2b.  Then I'm throwing in another billion for savings from LAS rundown, although I figure it will be more than just 1 billion.

 

The Fed wording suggests they are allowed to return based on their forward looking capital generation, not their present level.

 

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Sorry, meant to post here...

 

I estimate BAC's earning power right now, after adding back FVA, DVA adjustments, etc., but before any cost savings, is about $12.2 billion pre-tax.

 

That sounds right.  And then they expect to fully implement "NewBAC I" by end of Q3, giving them $2b of savings over Q4'13 and Q1'14.

 

That gets them to $14.2b.  Then I'm throwing in another billion for savings from LAS rundown, although I figure it will be more than just 1 billion.

 

The Fed wording suggests they are allowed to return based on their forward looking capital generation, not their present level.

 

 

So say they have roughly $13.4B to save from LAS non-core operating and litigation then another roughly $4B remaining under New BAC, or $17.4B in total....let's assume they have zero realization in 2013 (for simplicity), then 1/3 of the 17.4 is realized in 2014 and 2/3 in 2015 before the full 17.4 in 2016. That's $17.4B in pre-tax realization over the next 3 years.

 

If adjusted EBT is $12.4B, that's $37.2B cumulative over three years, bringing total pre-tax cash flow to $54.6B before excess R&W losses ($17.4 + $37.2). I come up with $10.6B of possible R&W losses over and above current reserves based on prior settlement rates, etc., which leaves $44B of pre-tax cash flow....

 

At an effective tax rate of 17.5% (half of the statutory 35% rate to be conservative), that's ~$36B of after-tax excess cash flow over the next three years. My $.35 annual dividend adds up to $11.9B total dividends over three years, leaving $24.1B for buybacks. Perhaps we will be unlucky enough to have the stock rise above tangible book, but assuming a $24.1B buyback at an average price of TBVPS, or ~$12.40, BAC could retire 17% of shares outstanding over the next three years.

 

If those earnings are instead taxed at 0%, versus 17.5%, shares retired rises to 23% of fully diluted shares outstanding...if BAC only has $6B of excess R&W versus $10.6B, untaxed, that's another 3% of shares out.

 

All that to say, the scenarios can get pretty exciting.

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The Fed approved JPM's plan to buy back $15 billion worth of stock last year.  BAC is a lot stronger than JPM was last year.  I would be very disappointed if BAC were to only buy back $3 billion of stock next year.  Moynihan has said that all excess capital sitting on the balance sheet is there waiting to be distributed to shareholders.  I would hope he would take advantage of the low stock price with large amounts of buybacks.  He's also said that it is a priority to at least get back the shares that were issued during the crisis.  This is what BAC issued during the crisis....

 

10/7/08 455 million @ $22

5/19/09 1.25 billion @ 10.77

12/3/09 1.29 billion @ 15

 

They should make it a priority to retire these 3 billion shares as Moynihan has said.

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My numbers were what I thought the bare minimum would be.  I don't want to get expectations too high because the Fed does what the Fed does.  If they treat BAC like the other banks then the payout will be higher.  But if they treat BAC based on legacy issues, then my numbers are what I think they will be around.  Many of you thought they would be able to return capital last year and I said I didn't think so...another year.  Well, that year has past and they've overshot my expectations.  Let's hope the Fed sees it that way too!  Cheers!

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The Fed approved JPM's plan to buy back $15 billion worth of stock last year.  BAC is a lot stronger than JPM was last year.  I would be very disappointed if BAC were to only buy back $3 billion of stock next year.  Moynihan has said that all excess capital sitting on the balance sheet is there waiting to be distributed to shareholders.  I would hope he would take advantage of the low stock price with large amounts of buybacks.  He's also said that it is a priority to at least get back the shares that were issued during the crisis.  This is what BAC issued during the crisis....

 

10/7/08 455 million @ $22

5/19/09 1.25 billion @ 10.77

12/3/09 1.29 billion @ 15

 

They should make it a priority to retire these 3 billion shares as Moynihan has said.

 

Did he say all excess returned to shareholders?  I thought the tune he's been singing was roughly 1/3rd buybacks, 1/3rd dividend, 1/3rd reinvestment

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The Fed approved JPM's plan to buy back $15 billion worth of stock last year.  BAC is a lot stronger than JPM was last year.  I would be very disappointed if BAC were to only buy back $3 billion of stock next year.  Moynihan has said that all excess capital sitting on the balance sheet is there waiting to be distributed to shareholders.  I would hope he would take advantage of the low stock price with large amounts of buybacks.  He's also said that it is a priority to at least get back the shares that were issued during the crisis.  This is what BAC issued during the crisis....

 

10/7/08 455 million @ $22

5/19/09 1.25 billion @ 10.77

12/3/09 1.29 billion @ 15

 

They should make it a priority to retire these 3 billion shares as Moynihan has said.

 

Did he say all excess returned to shareholders?  I thought the tune he's been singing was roughly 1/3rd buybacks, 1/3rd dividend, 1/3rd reinvestment

 

That's right, he gave the 1/3, 1/3, 1/3.

 

He also said everything above the minimum capital requirement (+50 bps) will be returned.

 

So I interpret his words to be that he'd like to return anything that tips us over the 9% threshold -- when there is an opportunity to invest that 1/3 in the business (and leverage it up with loans so that it doesn't tip us over 9%) then he will do so.  Maybe some gets pushed up to the parent to retire high cost debt, and meanwhile loans expand in the subsidiary -- keeping the 9% ratio neutral.

 

Actually, the Fed has also said that returns can only be 30% dividend.  So for those of you that are hoping for a higher mix of dividend yield, well it's not going to happen.

 

EDIT:  Maybe the game is to get dividend approval for 30% of your expected capital generation and buyback approval for all rest.  Then you don't do as much buybacks if reinvestment (lending) opportunities arise. 

 

Otherwise (if there is not enough loan demand to reinvest anything back in the business), the capital ratio will just build up.

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