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Summary of BAC conference call with Fairholme

|Includes: Bank of America Corporation (BAC)

I could not get the chat transcript where Brian Moynihan, Bruce Thompson gave a summary of where Bank of America stands today and fielded questions. I am hence summarizing it on my own as I think this would be useful.

Opening remarks:
July 2011 credit cards spending were 7% higher than July 2010. Gas prices contributed to only 2% of the 7% increase. So the consumer is actually spending more than what he used to.
Consumer leverage, Financial Leverage, Companies’ leverage much lower than 2008 levels.
Company has twice the capital they had after the Merrill merger.
The capital building is over and if at all any share repurchase and shrinking the shares outstanding would be the focus in the next 4 years.
No acquisitions. No proprietary trading. Tightening the underwriting standards.
Grow consumer business and sell noncore assets (China Construction bank).
Expenses are running out flat because of overhead with CRES and efforts on to reduce the expenses. Shut 63 less performing branches. On track to shut 750 branches the next 2 years.
Second quarter all business made money $5.7 bn in profits if we exclude the mortgage charge.
Deposits grew in second quarter while interest paid dropped.
Credit card business improved. 2bn in Net Income. Delinquency as a % of total approved outstanding continue to shrink.
Global Trading business made 1.6 bn after taxes. Investment Banking business, the second largest in the world.
The two major risk are mortgage risk and capital:
·         Reserves of 18bn have been built in the last 2 quarters even after the write off
·         Loan reserves for credits losses 37bn. This is 1.6 times the annual charge offs
·         Loan loss reserves with in mortgage business is 27bn. This is 2.5% the Total mortgage outstanding
·         Once a loan is 180 dues past due it is written down to Net realizable value
·         Additional reserves for litigation matters
·         Mortgage servicing right of 12bn dollars. Selling mortgage servicing rights to derisk.
·         Basel III capital would be in excess of what is required on January 1, 2013
·         Growing capital beyond capital requirements for Basel III.
·         Capital to accrue at a greater than Net Income because of Deferred Tax Assets.
Q and A
1.       How can we trust the current reserve?
·         Loans due greater than 180 days are automatically written down to liquidation value. Peak of Home equity charge off has gone down from 4% in 2009 to 1.5% now.
·         Mortgage put back risk has been reduced.
·         There are very few assets on balance sheet which are difficult to value.
·         Assets are Marked to market. Price verification looks at them and Auditors review them
2.       How do we know there is no big hole in the Balance sheet?
·         Enough reserves for Mortgage put back.
3.       How can investors verify your numbers?
·         Built excess reserves and now releasing them which means the reserves are real.
4.       Bad debt in credit card business
·         220 bn in credit card loans in 2008  to 130 bn credit card loans outstanding. Mainly charge offs have brought this down. We charged off and moved forward
·         7 good ones remain and 3 bad ones are gone in card business. So 130 bn of Loans outstanding is better than 220 bn of average loans
·         705 is the average fico score of the credit card borrowers
·         Pool of 2008 underwriting is 7.5% delinquent. Pool of 2010 underwriting has 1.9% delinquent.
·         Delinquency and charge offs are coming down even though the unemployment is going up as the portfolio is much better.
5.       Interest on Bad assets. Reducing exposure.
·         Most of the bad assets are on Mortgage servicing business
·         Servicing bad assets is 1.5bn a quarter and this will reduce substantially in the long run
·         40 bn dollars was the loan portfolio from country wide that is on the balance sheet and it has been written down twice to 25bn.
6.       How do we get to 50 bn in pretax earnings by 2014?
·         8.5 bn was pretax earnings was done in Q2 other than charges. So 50 bn a year is not far out. If fed funds rate continue to be low 50bn is definitely doable. Costs will also go down by 1.5 to 2bn after the mortgage cleanup.
7.       Earnings power enough to face problems without raising capital?
·         Very comfortable. If we predict a 4 year recession then it is a different story
8.       1% ROA.10% ROE is it possible?
·         Low teen ROE is possible.
·         1% return on an improved Balance sheet with better assets is definitely possible.
9.       Dividends and buybacks. Timeframe?
·         Short time none. All th money would go to shore up capital.
·         Approval from regulators is important. 30% payout certainly possible in medium term 2-5 years. 70% to shore up capital
10.   Inside buying
·         They are all paid in stocks. Everyone here is paid in stocks. CEO has most of his portfolio in Bank of America stocks
11.   Critics arguing that BOFA is not offensive enough
·         We serve consumers. That is my offense. We are on offense today. 230 bn in capital and all the good ratios with 400bn in liquidity is offense to me. Leadeship in 6/6 segments we serve is offense.
12.   Performance of Brian (judging himself)
·         Strong corporate performance. Strengthening the franchise.
·         Poor stock performance. Will reverse this.
13.   Ability to reduction in banking fees
·         Voluntarily got rid of OD fees.
·         Accounts have been reprised to collect monthly fees. 500mn fee quarterly on monthly fees
·         More and more customers are going online, phone banking and do not have to go to a bank. These are savings by closing banks
14.   Mortgage forgiveness. How does t help BOFA?
·         Stabilizes housing which is good for us
·         15 million mortgage customers and early stage delinquency is moving down. As long as unemployment does not degenerate the trend is expected to continue
15.   European exposures.
·         Continue to bring down exposure to foreign sovereign debt.
·         They have been prepared for this and the exposures are minimal.
·         16.7 bn is exposure in total. 1.7 bn is sovereign exposure of which 1.5 bn is default protected.
·         Managing counterparty risk on a entity by entity basis.

Disclosure: I am long BAC.