Bank Of America: Diamonds Are Forever
Fairlight Capital • 107 Comments
Fairlight Capital • 107 Comments
Thu, Apr. 28, 3:17 PM
- What's the bank doing to get more efficient, asked 9th-grader Natalie Clarke of Bank of America (BAC -0.9%) CEO Brian Moynihan at the annual meeting this week. BofA, of course, has a notoriously high efficiency ratio (like in golf, high isn't good).
- Clarke is the owner of 5K shares of Bank of America given to her as a baby, and at previous annual meetings has queried about her father who got laid off and about pay for women. This year she got serious: "You and I are looking at some pretty bad numbers," she told Moynihan. BofA is about flat since Moynihan took over, and sells for just two-thirds of book value. Its 11% decline in 2016 stands against just a 3.5% fall in the KBW Bank Index, and is worse than its big bank peers.
- As for Clarke's holdings, she got her shares in 2002 when BofA was a $34 stock, more than double today's price.
- “There’s a perception that you guys shine your shoes, go to work and wait for interest rates to rise,” said the considerably older Mike Mayo at the meeting. Mayo later said Clarke's questions did a good job of summarizing the concerns of bank investors.
Wed, Apr. 27, 1:34 PM
- In no surprise, Bank of America (BAC +0.1%) owners elected all 13 directors nominated by the bank, and approved compensation for top management.
- Also, no surprise, owners rejected a "clawback" proposal in which the bank could have held onto a substantial portion of the pay of executives for at least 10 years.
- Among the speakers was analyst Mike Mayo, who criticized the board's independent members for not holding CEO Brian Moynihan and team more accountable for hitting financial targets. He called the compensation proposal "extra pay for management."
- Mayo upgraded BofA to Outperform about three months ago, arguing the cheap valuation and strong balance sheet made the stock a buy despite poor corporate governance.
- Annual meeting webcast
Tue, Apr. 19, 1:29 PM
- Having had some time to digest weak, but better-than-hoped Q1 results for the nation's largest lenders, Goldman analyst Richard Ramsden remains bullish on the likes of Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC).
- He notes NIMs expanded - meaning banks held onto most of the benefit from the Fed's December rate hike. Cost-cutting programs are beginning to bear fruit, with 9% Y/Y cuts in compensation costs, and 3% declines in non-comp expenses.
- As for energy, provisions made for a 9% drag on EPS, but reserves now stand at 6% of funded energy loans, or 11% of E&P oilfield service loans.
- Ramsden is looking for robust loan and deposit growth for the rest of this year.
- His favorite name is Bank of America with a $17 price target (vs. current $14.39). The stock trades at 10.5x 2016 earnings, but probably has the most sensitivity to higher rates, and the most core and non-core expense leverage.
Thu, Apr. 14, 10:32 AM
- Living will: The fixes are "completely doable," says CFO Paul Donofrio, addressing yesterday's rejection of his bank's wind-down plan.
- Return on assets: ROA slipped to 0.5% in Q1 from 0.6% a quarter earlier - just half of CEO Brian Moynihan's goal of 1%. Moynihan tells callers interest rates will have to rise before that level can be reached.
- Mobile still growing fast: The bank in Q1 had 19.6M active users of its mobile banking services, up 15% from a year ago. 16% of deposits are now done through mobile devices. On branch cuts, management says they are consolidating into larger branches, and the new ones look more like a sales office than a traditional branch. Donofrio: “I think the branches are not going to be places where people come to transact. They’re going to come for a product they need because something changed in their life."
- Expenses: The efficiency ratio improved, but it's still a whopping 75% vs. peers in the mid-to-high 50s. Moynihan wants to at least get it down to the low-60s. Pressed on expenses by Mike Mayo, Donofrio says the bank is splitting cost savings between future growth and the bottom line. "It's a lever we can pull over an extended period of time."
- Presentation slides
- WSJ blog
- Now read: Bank Of America: This Is Disappointing! (April 14)
- BAC +1.1%
Thu, Apr. 14, 7:13 AM
- Consumer banking net income of $1.785B up 22% Y/Y. Net interest income of $5.185B vs. $4.872B. Noninterest income of $2.463B vs. $2.534B. Noninterest expense of $4.266B vs. $4.367B. Provisions of $560M vs. $716M. Deposits up 8%; average loan balances up 8%. Mortgage production down 3%. Branches of 4,689 down from 4,835. Efficiency ratio of 56% improves by 300 basis points.
- Global Wealth and Investment Management net income of $740M vs.652M a year ago.
- Global Banking net income of $1.066B vs. $1.367B a year ago. Provisions of $553M up from $96M thanks to energy.
- Global Markets net income (excl. DVA) of $889M vs. $926M a year ago. Excluding litigation, noninterest expense fell 9% as revenue (excl. DVA) fell to $3.797B from $4.592B. Sales and trading revenue fell 16% to $3.3B, with FICC down 17% and equities down 11%.
- Legacy Assets and Servicing net loss of $40M vs. loss of $237M a year ago. Noninterest expense down to $860M from $1.2B. Litigation expense down to $131M from $179M.
- Utilized energy exposure of $21.8B down $300M from a year ago. Exploration and production and oil field services exposure of $7.7B down slightly and representing less than 1% of total corporate loans. Energy reserves of $1B up $525M during the quarter.
- Tangible book value per share of $16.17 vs. $15.62 three months earlier. CET1 ratio of 11% using standardized approach; 10.1% using advanced.
- Conference call at 8:30 ET
- Previously: Bank of America EPS in-line, misses on revenue (April 14)
- BAC -1.3% premarket
Thu, Apr. 14, 6:52 AM
Wed, Apr. 13, 5:30 PM
Wed, Apr. 13, 11:31 AM
- JPMorgan's revenues and profits both fell from a year ago, but the lame performance of the banks thus far this year has already priced in a weak quarter. JPMorgan is higher by 3.8%, with Citigroup (C +4.7%), Bank of America (BAC +3.5%), Wells Fargo (WFC +1.7%), Goldman Sachs (GS +2.9%), and Morgan Stanley (MS +4.4%) joining the party. The XLF is higher by 1.75% vs. the S&P 500's 0.7% advance.
- But what about all of these players (except for Citi) having their living wills rejected by the Fed, FDIC, or both? A sideshow, no doubt. Regulators are going to regulate - like the commercial goes, "It's what they do." Banks will tweak plans, numbers, or whatever they need to in order to get D.C. to eventually sign off.
- ETFs: XLF, FAS, FAZ, UYG, VFH, IYF, BTO, IAI, IYG, FNCL, SEF, FXO, RYF, KCE, FINU, RWW, XLFS, FINZ, FAZZ
Wed, Apr. 13, 8:12 AM
- As leaked last night, regulators have sent so-called living wills by five major U.S. banks back to the drawing board. JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), BNY Mellon (NYSE:BK), and State Street (NYSE:STT) have until Oct. 1 to revise their plans or face potential penalties.
- Official announcement
- Regulators were split on Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), with the FDIC giving Goldman a thumbs down, but the Fed not, and just the opposite for Morgan.
- Citigroup (NYSE:C) is the only one of the major banks not to have their plan rejected, though both the Fed and FDIC found "shortcomings" that need to be addressed by July 2017.
- The next time you're thinking about complaining over some silly fee charged by your lender, have a thought for the armies of accountants, analysts, and lawyers the bank is paying to comply with D.C.'s whims.
- ETFs: XLF, FAS, FAZ, UYG, VFH, IYF, BTO, IYG, FNCL, SEF, FXO, RYF, FINU, RWW, XLFS, FINZ, FAZZ
- Now read: Financials Are Set To Miss Already Lowered Earnings Estimates
Wed, Apr. 13, 4:42 AM
- At least half of the eight U.S. banks labeled "systemically important" are expected to receive "harsh verdicts" regarding their so-called living wills, sending them scrambling to revise plans about how they would handle a potential bankruptcy, WSJ reports.
- The move, which could come as soon as this week, would raise the prospect of higher capital requirements or other regulatory sanctions for some of the institutions, and underscore fears that the firms remain "too big to fail" without a taxpayer bailout.
- Related tickers: BK, STT, BAC, JPM, C, GS, MS, WFC
Tue, Apr. 12, 3:05 PM
- “Let’s not sugarcoat it, this is not necessarily a loan a bank wants to make at this point,” says Evercore ISI's Glenn Schorr, talking about loans banks have committed to for energy companies, but upon which those firms have not yet drawn.
- In Q1, energy borrowers announced draws of more than $3B on these loans, saddling banks with maybe more exposure to the sector than they or their investors would like right now.
- Citigroup (NYSE:C), for example, has about $20B in funded energy loan exposure, but commitments for nearly another $40B. Bank of America (NYSE:BAC) has loans of just over $20B and commitments for another $20B-plus. Wells Fargo (NYSE:WFC), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), SunTrust (NYSE:STI), Comerica (NYSE:CMA), Regions Financial (NYSE:RF), and KeyCorp (NYSE:KEY) are showing similar stories (though mostly smaller amounts). Add it up, and there's $147B of unfunded loans disclosed by the ten of the largest U.S. banks.
Mon, Apr. 11, 11:32 AM
- Focusing on "too big to fail" is too narrow a lens with which to analyze and make decisions about bank size and concentration, says the team at KBW, taking note of increased chatter of late about a forced breakup of the nation's largest lenders.
- Returns are part of the mix too, and if they're poor at the mega-banks, this limits credit creation in the economy - a signal, says KBW, that companies must "radically restructure" to get their stock prices above at least tangible book value.
- Looking at the stock prices of Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) during the past five years, KBW says Wells has traded above TBV throughout the time period - suggesting the bank is consistently creating returns above its cost of capital. Citi, on the other hand, has not traded above TBV for the whole period - "a clear market signal that the company should consider much more radical restructuring to create profitable business that can grow."
Thu, Apr. 7, 3:09 PM
- The 10-year Treasury yield at 1.69% has returned back to levels not seen since the panicky action in mid-February. And while the Fed has marked down its expectation of rate hikes this year to just two, short-term interest rate markets haven't even priced in one.
- This leaves those whose business model depends on riding the yield curve having to contend with not only a middling macro picture, but - once again - a rates lower for longer picture (although Jamie Dimon says his big fear is that markets aren't pricing in nearly enough in the way of higher rates).
- Citigroup (C -4.1%), Bank of America (BAC -3.3%), U.S. Bancorp (USB -2.8%), KeyCorp (KEY -3.4%), Regions Financial (RF -3.4%), BNY Mellon (BK -3.6%), E*Trade (ETFC -4.7%), Manulife (MFC -5.2%), Lincoln National (LNC -3.6%)
Thu, Apr. 7, 12:44 PM
- "We are confident in the capital strength of the large and mid-cap banks - and with that, their capacity for increased capital returns," says Credit Suisse's Susan Roth Katzke.
- Stronger balance sheets, she says, should outweigh what is a harsher adverse scenario from the Fed.
- Roth and team see a total net capital return increase of 77% vs. 58% in 2015, with a median payout ratio of 31% vs. 27%. Incremental dollars should be skewed to buybacks given cheap stock valuations and the Fed's preference for the flexibility afforded by repurchases.
- Best positioned for the highest capital return are Morgan Stanley (NYSE:MS), Regions Financial (NYSE:RF), Goldman Sachs (NYSE:GS), Fifth Third Bancorp (NASDAQ:FITB), PNC Financial (NYSE:PNC), and U.S. Bancorp (NYSE:USB).
- The highest incremental capital returns should come from Zions Bancorp (NASDAQ:ZION), Citigroup (NYSE:C), Bank of America (NYSE:BAC), and M&T Bank (NYSE:MTB).
- The lower end of payout ratios should fall on Huntington Bancshares (NASDAQ:HBAN) and Bank of America.
- Now read: Sell The Banks: The Invisible Hand Is Broken (April 4)
Tue, Apr. 5, 1:23 PM
- The Department of Labor this week is expected to release final regulations requiring brokers to act with a fiduciary standard - that is act solely in the best interest of their client. Previously, recommendations only had to be "suitable" for clients - a less rigorous standard allowing excessive fees, and investments with hidden commissions.
- Investors now paying trading commissions will likely be moved into accounts where brokers collect fees based on AUM. Popular, but costly products like variable annuities, commodity pools and non-tradable REITs might no longer find a home in retirement accounts. They'll be replaced with low-cost index funds.
- Whether it all works out for the little guy remains to be seen, but one thing is sure: Regulatory costs will be on the rise, something larger shops - think Merrill Lynch (NYSE:BAC) and Morgan Stanley (NYSE:MS) - are going to be able to absorb better than smaller players who are more reliant on commissions - think LPL Financial (NASDAQ:LPLA) and Raymond James (NYSE:RF).
- Big providers of index mutual funds and ETFs are winners as well - BlackRock (NYSE:BLK), T. Rowe Price (NASDAQ:TROW), and WisdomTree (NASDAQ:WETF) fit the bill. Active mutual fund houses like Franklin Resources (NYSE:BEN), Legg Mason (NYSE:LM), and Waddell & Reed (NYSE:WDR), not so much.
- Insurers who are big providers are variable annuities could also be pressured - Ameriprise (NYSE:AMP), Lincoln National (NYSE:LNC), MetLife (NYSE:MET), Prudential (NYSE:PRU).
- Now read: Congratulations To All The New Fiduciary FAs Out There: Financial Advisors' Daily Digest (April 4)
Tue, Apr. 5, 10:05 AM
- In a research note to clients, Goldman noted that investors typically over-penalize declining profitability. To wit, the S&P 500 currently trades slightly above its 2014 year-end level of 2,059, but its P/B ratio is 4% lower at 2.7x.
- Goldman recommends clients consider the following stocks with low P/B ratios:
- AIG - P/B of 0.73, implied upside 22%.
- BAC - P/B of 0.89, implied upside 26%.
- C - P/B of 0.7, implied upside 25%.
- CFG - P/B of 0.89, implied upside 24%.
- HES - P/B of 0.8, implied upside 29%.
- LNC - P/B of 0.92, implied upside 17%.
- RF - P/B of 0.96, implied upside 34%.
- ZION - P/B of 0.88, implied upside 24%.
- Now read Best-Performing Value Strategies: The Price-To-Book Ratio »
Bank of America Corp. operates as a bank holding company, which provides banking and nonbanking financial services and products through its banking and various nonbanking subsidiaries throughout the U. S. and in certain international markets. It operates through five segments: Consumer and... More
Industry: Regional - Mid-Atlantic Banks
Country: United States
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