JPMorgan Chase Settlement Would Push Its Multiple Higher

JPMorganJoe Mabel [CC BY-SA 3.0], via Wikimedia Commons

JPMorgan Chase & Co. (NYSE:JPM)’s recent $13 billion mortgage settlement was within expectations and would push JPM’s pedestrian multiple higher, believes Sterne Agee.

Credit Suisse Group AG (NYSE:CS) analysts believe the vast majority of financial impact from the mortgage settlement has been recognized with JPMorgan Chase & Co. (NYSE:JPM) set to experience decline in its litigation costs from 2014 onward.

JPMorgan’s $13 billion settlement

Last week, JPMorgan Chase & Co. (NYSE:JPM) arrived at a settlement with the President’s RMBS Working Group of the Financial Fraud Enforcement Task Force. JPM will pay $13 billion for the resolution of all the actual and probable civil claims related to the sale of residential mortgage-backed securities. JP Morgan, Bear Stearns Cos. and Washington Mutual Inc. sold the RMBS before 2009.

Moshe Orenbuch and team at Credit Suisse Group AG (NYSE:CS) point out that the settlement includes a $2 billion penalty, as well as the previously announced $4 billion to the FHFA, $3 billion to other government agencies and $4 billion of borrower programs. JPMorgan Chase & Co. (NYSE:JPM) also recently announced a $4.5 billion settlement with Gibbs and Bruns for the JPM / Chase and Bear Stearns trusts from 2005-2008.

The analysts also note that the settlement doesn’t include WaMu private label, though the analysts expect that amount would be less than $2.5 billion and is likely provided for in existing litigation reserves. Credit Suisse analysts point out that JPMorgan believes that it is not responsible for WaMu private label securities and if it ends up settling, JPMorgan Chase & Co. (NYSE:JPM) would likely go after the FDIC and the Receivership.

Credit Suisse reiterates Outperform rating

Credit Suisse analysts believe financial aspects largely accounted for by JPMorgan Chase & Co. (NYSE:JPM), though remaining issues include an ongoing criminal DOJ investigation as well as several civil issues, such as monoline claims.

Moshe Orenbuch and team at Credit Suisse Group AG (NYSE:CS) believe JPM likely have nearly $10 billion of litigation reserves available post these remaining issues.

Credit Suisse analysts believe the vast majority of the financial impact has been recognized and in the beginning of 2014, litigation costs should begin to decline for JPM. The analysts reiterated their Outperform rating for JPM with a $65 target price.

Sterne Agee also pegs JPM’s target price at $65

Todd L. Hagerman and Robert Greene of Sterne Agee believe JPM’s $13 billion settlement was within expectations and hence would offer much-needed relief from the persistent legal overhang on the shares.  The analysts point out JPMorgan Chase & Co. (NYSE:JPM)’s announcement follows 3Q13’s $9.3 billion legal charge as part of its outsized legal reserve of $23 billion, with no expected adverse impact on 4Q13 earnings. The analysts note JPMorgan Chase & Co. (NYSE:JPM)’s recent announcement represents an important step in formally reducing JPMorgan Chase & Co. (NYSE:JPM)’s legacy mortgage-related exposures.

The analysts believe with the sizable reduction in legacy mortgage exposure, JPMorgan Chase & Co. (NYSE:JPM)’s pedestrian multiple will finally begin to edge higher and pegged its target price at $65.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports

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