Osiris Farol

Osiris Farol
Contributor since: 2012
You are right the DTA is not included in Tier 1 capital under B3. However, I am not sure the extent to which the consensus estimate for 2014 eps of $1.36 already includes DTA-related tax effects.
Thank you for comment; you are correct.
I believe management has stated they are targeting a 9% Tier 1 ratio so the analysis stands but, as you note, this is higher than the B3 requirement of 8.5% at least excluding any counter-cyclical buffer that may kick in at a national level if and when the economy and credit growth recover.
I think what you are missing is that until the last quarter BAC had not bought back any common stock since the financial crisis. There was therefore nothing to offset the compensation-related issuance of stock and stock options to management, and the increase in the diluted share count (used in eps calculations) arising from the increase in the stock price.
This changed in the second quarter when BAC repurchased $1 billion of common stock, and I expect it to keep at least that run-rate going until the second quarter of 2014 when it will likely increase meaningfully following this year's CCAR process and March 2014 increase in Fed authorization for stock buyback to the $10 billion mentioned in the article.
As a long-term shareholder, you might rationally want the stock price to fall so that the buyback retires more shares; if the stock price rises, however, I imagine that will not be too disappointing.
Kinte - the cfo has commented that bac expects to be "balanced" and work through the share repurchase authorization over the course of the year. I wish we had some sense of whether the stock price factors into timing.
Fifth Capital - Thank you!
MexCom - A release of litigation reserves is possible; unfortunately, it is also possible that the reserves (because of the accounting requirements for establishing them) will not be sufficient. Indeed, BAC estimates a maximum possible loss, over and above established reserves, of $4 billion.
Speedy12 - If you take a look at the earnings transcript, you will see a discussion between the CFO and an analyst on the modeling errors.
Under Sarbanes-Oxley of 2002, a CEO or CFO who wilfully files a false certification that the annual and quarterly reports "fairly present" the finances of a company can be fined $5 million or jailed for up to 20 years.
Richard Scrushy, former CEO of Healthsouth faced criminal charges for false certification but was acquitted. A number of executives at companies involved in the mortgage crisis, including Fannie Mae, Freddie Mac and Countrywide, faced civil charges for false certification. I am surprised none of the executives at major banks faced similar charges in the aftermath of 2008.
Nonetheless, senior executives have an incentive not to wilfully mis-report; of course, this does not relieve the risk of incompetence or good-faith error.
Thank you! The mix-shift in liabilities does not seem to be enough taken into account and, of course, will reverse when short rates back-up and the opportunity-cost of checking deposits rises. I wonder whether the complaint will then be weaker deposit growth!
Thank you to both Ray Merola and dneedle1!
You are right about the goal. Here is what CEO Brian Moynihan said in Jul 2011: "We need to get back most of the shares we issued in the crisis, that caused all the dilution". The link is below:
(http://bit.ly/Sr1AdR)
It is an excellent question, and one that has no clear answer.
Aside from tax effects, and if you believe the stock is fairly valued, a stock buyback makes no theoretical difference to intrinsic value as explained here http://bit.ly/Y0azEF.
However, theory and practice seem to differ since research suggests the announcement of stock buybacks does lead to an increase in stock prices. A possible explanation is the signaling effect: if management, which is presumably better informed than outsiders, chooses to buyback stock then there is a possible signal that market value is below intrinsic value.
This may be true in some cases but is not right now for WFC (as an example). The bank is buying back just enough shares so that share-based compensation to employees does not increase the share-count and hence tend to reduce earnings-per-share.
This sort of accounting-based policy means there is no signal about intrinsic value in the stock buyback: indeed, it suggests management will buyback stock whether or not the price is below intrinsic value so that, if it is not, the policy can be value-destroying to continuing shareholders.
With the new rules (allowing banks to make a one-time downward revision to the capital plan in their initial submission before the Fed makes a formal ruling), it is less risky to ask for a dividend-raise than last year.
However, the banks seem highly averse to the risk of capital plan rejection - so much so that C is not even asking for a dividend raise this year. I expect BAC will follow the same route particularly given it has higher earnings variability and mortgage litigation risk.
You raise an interesting point, and I would agree if the stock price were higher.
As it is, I think management will prefer buying back common stock at ~40% discount-to-book over paying a 5% premium-to-book to repurchase any of Buffett's $5 billion of preferred shares (even though, at 6%, the dividend costs them $300mm/year).
I could be mistaken, however.
Thank you for this question, and I agree that stock buyback can be abused by management if it acts, not on economics, but merely out of a desire to signal confidence or increase EPS. However, if there is capital over and above that reasonably needed for the business in the near-term and the stock is available below intrinsic value, then stock buyback makes economic sense.
I believe these conditions are met for BAC even if we also assume a modest increase in the dividend.
Thank you; I am glad to have the citation.
Thank you to Getzeman and milessoldier for the kind remarks!
My guess would be that late-adopters, particulary those who purchase a product version that is not the latest, are more price-sensitive. As a result, there is a mix-shift over time from the premium, memory-enhanced models to the base model.
I find it striking the data indicate that all purchases of the iPhone 4S after the release of the iPhone 5 were for the base model.
The analysis leans heavily on the data around iPhone purchases by model (i.e., 16GB, 32GB, and 64GB) from Consumer Research Intelligence Partners. It also assumes the purchase behavior, that most first-adopters by premium models with additional storage capacity, holds for the iPad line as well as the iPhone line.
The analysis also relies on the teardown analysis from iSuppli which, among other things, gives the cost of memory.
Thank you.
Thank you for the kind remarks, and properly noting the analysis would be better if it took into account different carrier subsidies around the world.
The second table in the article (confusingly labelled Table 1) suggests that in October 2011, when the iPhone 4S was released, 10% of purchases were for older models (7% for the iPhone 4 and 3% for the iPhone 3).
In October 2012, when the iPhone 5 was released, 32% of purchases were for older models (23% for the iPhone 4S, 9% for the iPhone 4, and zero for the iPhone 3). These data are distorted, of course, because the iPhone 5 was not available for the entire month.
However, the data do suggest that there are value-buyers of old-version phones. Importantly for the article, these buyers exclusively purchase the base models without the memory upgrades favored by early-adopter purchases of new versions.
Thank you for the careful read and remarks.
The confusion over margin arises from the distinction between: (1) "teardown" margins (referred to as manufacturing margins in the article) sourced from iSuppli; these are ~70% for the iPhone 5, ~40% for the iPad Mini, and ~35% for the retina-display iPad; and (2) reported margins which, from Court documents, are 49-58% for the iPhone and 23-32% for the iPad.
The difference is costs, other than bill-of-materials and manufacturing, that are not in the iSuppli teardowns but are included in AAPL's calculation of gross margins; these include, for example, royalty payments and reseller discounts. AAPL has said that the iPad gross margin is lower than the corporate average and this is consistent with the Court figures above and the 38% figure you mention for the corporate result.
I agree that the use of the word "up-sell" was confusing and regret it. As commented by theregans below, I was thinking of gross margin on a percentage-basis, but it is more relevant to the economics to think of gross margin on a dollar-basis as you calculate.
Thank you to both rcpatrick5443 and wgt46 for the kind remarks.
I apologize for any confusion. The article is intended to convey that a mix-shift within the iPad line to the iPad Mini may increase margins for the line (because the teardown margin of the Mini is ~40% versus ~35% for the "regular" or retina-display iPad).
However, a likely mix-shift from the iPhone to the iPad line, including the Mini, may depress firmwide margins because the iPhone has a higher teardown margin of ~70%.
Looking out beyond the 5-year horizon of the above analysis requires a valuation of Vale's mineral reserves which I have not completed.
It is a useful exercise because, if the above analysis turns out to be correct and Vale issues shares in the next year or two to fund the capital budget, I would expect a negative market reaction and possible attractive entry.
With the stock at <60% of book value, stock buyback seems more compelling than a dividend raise. That said, well-capitalized banks such as WFC and USB have payout ratios close to 30% and I imagine BAC would like to begin to move towards this level (which is still less than the >40% before the financial crisis).
On 12/18, CEO Brian Moynihan told Reuters that earnings consistency would be an important part of the discussion with the Fed around the return of capital to shareholders. I expect this is particularly important for the dividend discussion, and could be complicated by the likelihood of further litigation expenses.
Thank you for your kind remark. I find it unsettling that Vale implicitly endorses the Macquarie presentation (by using it in their Dec 3rd Investor Presentation, for example) pegging their CIF China cost at just over $40/tonne when it appears from their financial reports that this is actually the FOB cost. Even at the low dry bulk rates of today, the difference seems to be $10+/tonne.
Thank you! I am glad you are nearly back to break even after a long and, no doubt, rather fraught experience.
Thank you. If BAC gains $3 or $4 this year, we can proceed to party!
I can see the case for management to over-accrue. CEO Brian Moynihan commented to Reuters on 12/18 that the Fed wants the bank to show "consistent earnings" as part of the permissioning process for returning more capital to shareholders.
Of course, much of the downside volatility in earnings has arisen from on-going provisions for legal risk, and a large one-time accrual could help to address this (since settlements or judgments could then be debited against the resulting reserve and not earnings).
Against that, accounting standards allow the bank to accrue only for possible losses that are probable (or reasonably possible) and estimable. This means possible losses that are not estimable are not reflected on the balance sheet even though they may turn out to be material; in short, it is reasonably likely that the bank may turn out to have under-accrued relative to the ultimate liability.
Management has signaled this by suggesting that losses could be up to $6bn more than the reserve, and added that even the reserve plus this additional amount does not represent an estimate for the "maximum loss exposure"