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Osiris Farol

 
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  • Bank Of America: Expect Stock Buyback In 2013 [View article]
    Thank you and MilesSoldier for the feedback; I see what you mean and apologize for the confusion.

    The gist of the article is that BAC is highly capital-generative. In 2012, this supported a doubling of the stock price because, as capital accumulated on the balance sheet, investors likely became less concerned about the risk of a dilutive share issue.

    Looking forward to 2013, BAC will continue to generate capital but will no longer need to retain it all because its capital position already meets regulatory requirements (now and well into the future); in short, there will likely be significant excess capital.

    My expectation is that regulators will permit BAC to return some of this excess capital to shareholders in the form of stock buyback, and this will catalyze a re-rating of the stock from the current price of $11.3 higher towards book value which is currently $20.4.
    Dec 28 11:26 PM | 4 Likes Like |Link to Comment
  • Bank Of America: Expect Stock Buybacks To Accelerate In 2014 [View article]
    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.
    Oct 6 11:54 PM | 3 Likes Like |Link to Comment
  • Apple: The Astonishing Margin On Flash Memory [View article]
    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.
    Jan 9 04:22 PM | 2 Likes Like |Link to Comment
  • Bank Of America: Expect Stock Buyback In 2013 [View article]
    It looks as though, in order to for a settlement to occur, there needs to be more clarity around whether MBIA can place its structured finance unit into rehabilitation or liquidation (thereby making it more difficult for policyholders such as BAC to collect on their claims) without adverse consequences for the parent. Unfortunately, I have not done the legal analysis on viability or timing and would welcome any insight.
    Dec 28 10:10 PM | 2 Likes Like |Link to Comment
  • Bank Of America: Revisiting The Valuation Case [View article]
    I agree there is earnings leverage at BAC as provisioning for legal matters (including mortgage repurchase) declines and cost-saves flow through. You probably remember that at the Investor Day in March 2010, CEO Brian Moynihan suggested earnings, before taxes and provisions, of $45-50 billion (albeit in a more "normal" interest rate environment). Even getting some of the way there could represent a meaningful lift over the ~$15 billion (annualized) for the first three quarters of 2012.

    I also expect that, following the regulatory stress-tests planned for early 2013, BAC will gain Fed permission to return capital to shareholders with an announcement possibly as early as March. If the stock still trades at a substantial discount to book value, stock buyback will be attractive and a likely catalyst for re-rating particularly if accompanied by a dividend increase.
    Dec 28 02:32 AM | 2 Likes Like |Link to Comment
  • Bank Of America: Revisiting The Valuation Case [View article]
    I agree there is balance sheet risk. For what it is worth, BAC passed the stress tests (results announced last March) suggesting it had the balance sheet strength to meet minimum regulatory capital standards in an "extremely adverse" scenario.

    Going forward, I expect BAC to request Fed permission to increase the dividend next year; if granted, this will provide some validation of the balance sheet and earnings power.
    Dec 27 09:40 AM | 2 Likes Like |Link to Comment
  • Bank Of America: Revisiting The Valuation Case [View article]
    I agree the balance sheet risk is high for large banks and, along with stiffer regulatory capital requirements, a key reason the stocks are trading at or below book value in notable cases. For BAC, in particular, there is significant incremental balance-sheet risk because of litigation around allegedly improperly-sold mortgages. This probably accounts for the fact that BAC is trading at 56% of book value versus 88% for, say, JPM.
    The protection available to owners of BAC securities is in the form of the bank's capital. For example, at the end of Q3, BAC had $135 billion of Basel 3 capital on $1.5 trillion of corresponding risk-weighted assets for a Basel 3 capital ratio of ~9%. This capital appears more than needed for BAC to follow a comfortable glide path to meet the minimum regulatory capital ratio of 7% plus a global-SIFI buffer as it phases in through 2019 (even if that buffer is set at the maximum of 2.5%).
    To give an idea of relative scale, BAC has suggested that its liability for allegedly improperly-sold mortgages could be $6bn higher than allowed for on the balance sheet. If this is indeed the worst case and adjusting for taxes, it would reduce the firm's capital ratio by less than 0.3% and not make a meaningful difference to the go-forward, long-run economics.
    Dec 26 07:43 PM | 2 Likes Like |Link to Comment
  • Bank Of America: Revisiting The Valuation Case [View article]
    You are right that the analysis is sensitive to the assumption for normalized asset returns. However, in the case of BAC, there is a significant margin-of-safety because you are buying in at a price-to-book value of ~55%.
    Specifically, the risk to the analysis is that normalized equity returns for BAC - and hence large banks in general - are meaningfully below 10%. Even if they are only 8%, however, the analysis suggests you get an annual return on your investment in BAC of near 15%.
    Assuming BAC operates with normalized leverage of 10x (versus the current 8x), this equity return translates to an asset return of 0.8% which is significantly below the historical average of 1.2%+ albeit significantly higher than the 0.2% reported for the first three quarters of this year.
    Dec 26 05:00 PM | 2 Likes Like |Link to Comment
  • Bank Of America: Revisiting The Valuation Case [View article]
    I believe that BAC has shelved fee plans that would otherwise have come into effect at year-end.
    The challenge for BAC and other large banks is that heightened consumer sensitivity to fees along with regulatory restrictions on fees for debit-card overdrafts (because of Reg E) and merchant payments for accepting debit cards (because of the Durbin Amendment) make it more difficult to support the cost of checking accounts to customers with low deposit balances and low activity.
    I expect BAC to continue to attempt to stimulate more activity from these customers (e.g., use of bill pay and debit or prepaid card products) before taking an aggressive and public stance on fees.
    Dec 26 04:38 PM | 2 Likes Like |Link to Comment
  • Bank Of America: Expect Stock Buybacks To Accelerate In 2014 [View article]
    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.
    Oct 7 12:12 AM | 1 Like Like |Link to Comment
  • Bank Of America: Buy A Dollar For Around 85 Cents [View article]
    Fifth Capital - Thank you!
    Apr 18 01:27 PM | 1 Like Like |Link to Comment
  • Bank Of America: Buy A Dollar For Around 85 Cents [View article]
    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.
    Apr 18 01:26 PM | 1 Like Like |Link to Comment
  • Bank Of America: Why A Stock Buyback Is More Likely Than A Dividend Raise [View article]
    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.
    Jan 12 11:17 AM | 1 Like Like |Link to Comment
  • Bank Of America: Why A Stock Buyback Is More Likely Than A Dividend Raise [View article]
    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.
    Jan 11 04:23 PM | 1 Like Like |Link to Comment
  • Bank Of America: Reducing Balance Sheet Risk Ahead Of Expected Stock Buyback [View article]
    Thank you to Getzeman and milessoldier for the kind remarks!
    Jan 10 08:09 AM | 1 Like Like |Link to Comment
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