Business Description:
Massive increase in deposits YoY mostly from Increase in Federal Reserve System balance sheet
Massive increase in net income from release of reserves for credit losses of $5.2 billion in 1Q21
Catalysts:
Economic recovery in the US and around the World
Rising interest rates
More release of credit losses → do not contribute to actual growth, only paper growth
Increased dividends and share buybacks
Risks:
Zero interest rates, QE and banking regulations (Dodd-Frank Act of 2011) makes makes it harder for banks to do business
Financial Analysis:
Revenues of $33.1 Billion 1Q21 up $3.0 Billion QoQ
Revenues of $124.3 Billion in TTM vs $119.5 Billion in FY20
Net income of $14.3 Billion in 1Q21 up $2.2 Billion QoQ
Net income of $40.5 Billion in TTM vs $27.4 Billion in FY20
ROE of 23% vs 19% for 4Q20
ROTCE of 29% vs 24% for 4Q20
Overhead Ratio of 57% vs 53% for 4Q20
CET1 Capital Ratio of 13.1%
Issued $1.5 Billion in Preferred Shares in 1Q21
Common Dividends of $2.8 Billion or $0.90 per share
$4.3 Billion of common shares buybacks
2Q21 net buyback capacity of $7.4B, after paying common dividend of $0.90 per share
Valuations
My personal Biases
4.9% of my portfolio, buying since 2016
Likes management
Assumptions
Net income of $45 Billion for FY21 with further release of credit losses and economic recovery
Net income falls to $40 Billion in FY20, increasing by 4% annually
Discount Rate of 10% for the next 5 years
Terminal Growth rate of 2%
Exit Multiples Analysis
Based on Tangible Book value in 2025
2% annual increase in book value for base case (2.3% in last 5 years)
2.3% for bull case and 1.8% for bear case
4% of tangible book value paid in dividends every year (average for last 5 years)
15% of shares outstanding bought back over next 5 years in base case, 20% in bull case and 10% in bear case
Price to Tangible book value per share ranged from 1.2 to 2.3 in last 5 years, currently at 2.3, expected to rise if interest rates rises
Conclusion
Stock undervalued but future returns not expected to be much at current price
Good hedge against rising interest rates
Good stock to hold long-term
