Big Banks: $260 Billion Down, “Only” $65 Billion To Go, Says Morgan Stanley

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According to Morgan Stanley, the death by 1000 cuts that big banks have been going through for the last few years is not over yet, even after paying $260 billion in fines since 2009. In fact, a recent Morgan Stanley report estimates that global mega-banks (the top 25 largest banks) are still looking at around $65 billion in litigation costs remaining between now and 2017. Moreover, MS projects that European big banks may have as much as one-third of their litigation costs still in front of them.

Huw van Stennis and team end their report with the following investment conclusions: “US major litigation is largely behind us,except for the DoJ litigation on GS and Libor.We expect payout ratios at JPM, BAC and C to rise from an average 33% in 2014 to 67% in 2018e, similar to US Non G-SIFI peers. In Europe, we’re below consensus on divis for CS, BARC, DBK,STAN and HSBC but ahead for UBS.”

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Break down of litigation costs at big banks

In the first part of their August 19th report, van Stennis and colleagues take a closer look at the question how far through the litigation process are the big banks? Given that close to $260 billion has already been spent in litigation/settlement, Morgan Stanley is projecting yet another $65 billion in litigation expenses still on the way for the largest 25 U.S./EU banks by the end of 2017.

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Of note, U.S. mega banks are pretty clearly more advanced through the litigation settlement process than most of the European banks. The five largest U.S. banks have ponied up close to $137 billion in litigation and fines since the financial crisis, which MS estimates is around 90% of the final total they will end up paying. The largest 20 European banks have coughed up around $125 billion to date, and the MS base case projection is that they are only 70% done. This means Euro area mega banks are likely to spend an additional $50 billion in litigation costs through 2017.


Big banks - Some regulatory improvements and strengthening of corporate culture

The Morgan Stanley analysts do highlight, however that the big bank sector has made improvements in policy relating to conduct, incentives, early fraud detection and prevention. They note that while disclosure "is variable; however, we found numerous examples of how banks have changed policies and procedures in order to strengthen culture and increase their focus on compliance and risk management."

The MS team points out that the compliance headcount is increasing (for example, +117% at JP Morgan between 2012 and 2014), and Chief Risk Officers can now be found sitting on a number of boards. In terms of executive compensation, MS survey data indicates total pay across the sector has also dropped dramatically,  with a 32% drop between 2006 and 2014. The analysts also highlight an increased focus on long-term incentives, with long-term packages making up a larger percentage of total pay and greater disclosure regarding specific financial and non-financial targets in compensation packages.


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