Bank of America Corp (NYSE:BAC) could potentially face an additional penalty related to the DOJ, state AGs and RMBS Working Group investigations, note Credit Suisse analysts.
Moshe Orenbuch and Jill Glaser Shea of Credit Suisse in their research report dated March 27, 2014 note such additional an penalty / fine may not be fully reserved for.
Bank of America’s $9.3 billion settlement with FHFA
On Wednesday, Bank of America Corp (NYSE:BAC) reached a $9.3 billion settlement for claims that it sold Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) faulty mortgage bonds.
In January, Bank of America Corp (NYSE:BAC) received approval from the State Supreme Court in Manhattan for its $8.5 billion agreement to settle the majority of the complaints filed by almost two dozen mortgage securities investors.
Interestingly, analysts from Credit Suisse rightly noted that the court approval doesn’t provide complete finality and other legal issues still remain, including the FHFA lawsuit and DOJ fraud claims.
Outstanding issues remain
After the recent settlement reached by Bank of America Corp (NYSE:BAC) with the FHFA, the Credit Suisse analysts in their latest report point out that they view the settlement as a positive as it clears another legacy mortgage issue. However, the analysts note that there are still additional outstanding issues.
The Credit Suisse analysts anticipate that Bank of America Corp (NYSE:BAC) will potentially be subject to fines / penalties related to the DOJ, state AGs and RMBS Working Group investigations which could amount to an additional $3 to $5 billion (based on peers), which may not be fully reserved for.
The analysts point out that Bank of America Corp (NYSE:BAC)’s payment of $6.3 billion equates to 11% of purchase cost which compares to peer settlements of roughly 12%. They note BAC’s % impact was lessened by their willingness to put RMBS on the balance sheet.
The following table captures the list of US Financial Institutions named in FHFA law suit:
Turning their focus towards impact of settlement over Bank of America Corp (NYSE:BAC)’s financials, the Credit Suisse analysts anticipate the settlement would reduce 1QEPS by $3.7 billion (pretax) or $0.21 / share. The analysts have reduced their reported EPS to $0.03 / share for 1Q from $0.24 / share and 2014 EPS estimate to $1.09 related to the settlement.
The following table captures financials and valuation metrics:
The Credit Suisse analysts assigned a Neutral rating on Bank of America Corp (NYSE:BAC) and pegged their target price at $16.