The record $17 billion settlement reached by Bank of America Corp (NYSE:BAC) with the US Department of Justice will be positive for future stress tests and will remove operational risk, note JPM analysts in a recent research report.

Bank Of America BAC

However, analysts at Credit Suisse retained their “Neutral” rating on Bank of America and trimmed their full-year 2014 estimates.

Bank of America’s record settlement

As reported earlier, following the settlements reached by Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) has agreed to a record $17 billion settlement with the US Department of Justice over faulty mortgage derivatives products that led to the 2008 derivatives market crash.

Vivek Juneja and team at J.P. Morgan in their research report dated August 21, 2014, note the recent settlement is in line with expectations, though the cash portion is a little higher than anticipated. The analysts highlight that the settlement resolves the bank’s largest legal uncertainty and it also releases any current and potential claims for securitization related issues under FIRREA.

However, the JP Morgan analysts point out that some legal issues remain, such as potential claims related to MBS sales and the ‘high speed swim lane’ investigation. The analysts note the $8.2 billion private label settlement is still under appeal, though the biggest objector, American International Group Inc (NYSE:AIG), has settled recently and an overall settlement is also expected soon.

The JP Morgan analysts have assigned an Overweight rating and pegged their YE 2014 price target for Bank of America Corp (NYSE:BAC) at $17 based on 1.2x their YE 2014 tangible book value. However, they anticipate the bank’s shares will trade at a discount near term due to continued headline risk and pressure on revenues.

BofA Stock looks cheap – MS

Echoing a similar view, Betsey L. Graseck and colleagues at Morgan Stanley note the $9.65 billion hard-dollar DOJ settlement reached by Bank of America Corp (NYSE:BAC) includes CDO and removes a major overhang. The Morgan Stanley research report dated August 21, 2014 argues the bank’s stock will likely rally following a continuing decline in expenses.

The Morgan Stanley analysts decreased their 3Q14 EPS estimates by 38 cents to $(0.04) and note the bank’s stock looks cheap at 0.6x 2016 P/B on 9% ROE. They anticipate the bank will continue to drive down expenses and look for an additional $4.5 billion in annualized expense savings through the end of 2015, as mortgage and legacy asset operating costs come down. The analysts pegged Bank of America Corp (NYSE:BAC)’s target price at $22.00 and assigned an “Overweight” rating.

On the other hand, Moshe Orenbuch and Jill Glaser at Credit Suisse retained their “Neutral” rating on Bank of America Corp (NYSE:BAC), as they anticipate the recent settlement will reduce 3Q’14 reported EPS by $0.43 per share. Therefore, they have reduced their 3Q’14 reported EPS estimate to a loss of $0.09 and their full-year 2014 reported EPS estimate to $0.44.

The analysts anticipate this latest settlement is likely the last of the major mortgage issues for the bank, though the litigation costs have essentially kept book value of the bank flat for two years. The analysts pegged the bank’s target price at $16 to reflect 1.1 times forward tangible book value.