The Financial Times reported this morning that Bank of America (BAC) is moving roughly $50 billion in derivatives business from its Dublin-based subsidiary to its London-based subsidiary. In an otherwise pointless move, BAC is gaining quicker access to it's approximately $8 billion in deferred tax assets, or DTA, it possesses in the United Kingdom.
In addition, European regulators are reportedly on board with the decision as Irish authorities thought the business to be too large for the tiny country anyway, and British authorities would like to keep a closer watch on BAC in their country as well. The business was routed through Ireland after BAC inherited the operation through its acquisition of Merrill Lynch. In addition, Ireland's lower corporate tax rate was attractive for leaving the business there. But as the London subsidiary has racked up significant losses in recent years, BAC will gain nearly immediate access to its DTAs held in the U.K.
So What Is It Worth?
The Times estimates it will take at least until the end of 2013 to move the operation in its entirety from the Irish subsidiary to the British subsidiary. This long time frame is due to the fact that BAC must gain regulatory approval to make the move, and it also needs to renegotiate client contracts as the location -- and indeed the very country -- where the operations take place will be changing. Regulatory approval is as close to certain as it gets as both countries' regulators are alleged to be in favor of the move as detailed above.
However, the British corporate tax rate is being lowered in April to 23%, diminishing the value of the DTAs as a lower amount of tax savings will accrue as a result. The good news is that even though the DTAs are losing some value, after the DTAs are gone BAC will have a lower tax rate to pay in its British operations -- a long-term positive for shareholders.
Since we know BAC has about $8 billion in deferred tax assets in its British subsidiary and we also know that most (or all) of the net income that will be used to retire the DTAs will accrue after the April lowering of the corporate tax rate in the U.K., we can assume that the DTAs are worth in the neighborhood of $1.84 billion to the parent company and its shareholders. With BAC's roughly 10.8 billion shares outstanding, this means $0.17 per share in net income will theoretically accrue to BAC over the next few years or sooner. At an earnings multiple of 10, this should add something like $1.50 to $2.00 to BAC's share price over the period when the DTAs are retired. This is a very bullish development for BAC shareholders, and I believe it will be underappreciated or just ignored outright until after the benefits have already accrued.
I realize that the DTAs were priced into BAC's share price before, but that was also with the knowledge that the money-losing U.K. subsidiary was going to be unable to monetize the DTAs for some time until it was able to turn a profit. BAC's Irish unit is profitable now and will be able to monetize the DTAs starting immediately following regulatory approval and moving of the operation. This increases the fair value of the DTAs as they will be monetized much more quickly than they otherwise would have.
Bank of America shareholders should take notice of today's announcement that has the very real potential to add up to $2 to the share price over the next couple of years simply based on management moving a subsidiary from one location to another. The business, in my view, is now worth almost $2 more than it was yesterday over the long term based on these assets being monetized much more quickly than they otherwise would have. But the stock was trading down this morning with the broader market. This is a clear mispricing on the part of the broader market that enterprising shareholders can take advantage of.
After all, if BAC had opened down $2, wouldn't you take notice? The same thing is happening today; the business is suddenly worth $2 more than it was, except no one seems to care.