5 Bank Stocks Facing the Biggest Legal Risks (Update 1)


Updated to include details on Bank of America mortgage settlement deal reported by The Wall Street Journal Friday

NEW YORK (TheStreet)-- As U.S. banks still struggle to put the 2008 crisis behind them, legal overhang remains a major issue.

Whether its big institutional investors who say banks must repurchase bonds stuffed with fraudulent home loans, homeowners or attorneys general suing over improper foreclosures, or merchants suing over anticompetitive credit card fees, banks have no shortage of legal hassles. JPMorgan Chasealone is fighting 10,000 lawsuits.

Here, courtesy of Nomura, are the five banks facing the biggest litigation costs beyond what they have already set aside as a percentage of consensus earnings for 2012-2013.

5. JPMorgan Chase

With 10,000 lawsuits against them, you knew they'd be on the list somewhere. JPMorgan estimates it faces up to $3.315 billion in litigation after taxes, beyond what it has already paid out or reserved against. That adds up to 8.8% of the $37.612 billion JPMorgan is expected to earn in 2012-2013.

In 2011, JPMorgan's noninterest expense included $3.2 billion of litigation expense, mostly for mortgage-related matters, compared with $5.7 billion of litigation expense in 2010, according to Nomura's report

4. Citigroup

Citigroup estimates it is on the hook for up to $2.6 billion in litigation after taxes, beyond what it has already paid out or reserved against. That adds up to 9.9% of the $26.364 billion Citigroup is expected to earn in 2012-2013.

Citigroup faces a variety of regulatory inquiries and class action lawsuits related to its mortgage origination practices. The private lawsuits will not be included in a National Mortgage Settlement, reached last month with 49 state attorneys general and the federal government. Bank of America, JPMorgan, Wells Fargo and Ally Financial, the former GMAC, were also part of the settlement.

3. Bank of America

Bank of America estimates it faces up to $2.34 billion in litigation expenses after taxes, beyond what it has already paid out or reserved against. That would equate to 10.9% of the $21.455 billion the bank is expected to earn in 2012-2013. The bank faces lawsuits related to mortgage originations and servicing, as well as for alleged failure to disclose its knowledge of ballooning losses at Merrill Lynch ahead of its eventual acquisition of that company.

The $2.34 billion figure, however applies only to "those matters where an estimate is possible," according to the bank's annual 10-K filing with the Securities and Exchange Commission.

Bank of America has also struck a separate side deal as part of the National Mortgage Settlement, according to a report in The Wall Street Journal Friday. As part of the agreement, mortgages modified by Bank of America will be reduced by more than $100,000 on average, according to the report. The report also states that the deal will allow Bank of America to avoid as much as $850 million in penalties.

2. Regions Financial

Regions Financial estimates it faces up to $221 million in additional litigation costs after taxes, or 12.9% of estimated $1.707 billion in 2012-2013 earnings.

Regions is also on the hook for any litigation related to its Morgan Keegan brokerage unit, which it agreed to sell to Raymond James Financial Jan. 11.

1. Synovus Financial

Synovus faces just $39 million in potential litigation costs after taxes, above what it has written down or reserved against. However, that equates to 14.5% of the bank's estimated $270 million in 2012-2013 earnings.

As is the case with Bank of America, however, Synovus's estimates relate only to "those legal matters where the company is able to estimate a range of reasonably possible losses," according to its 10-K.

>>To see these stocks in action, visit the 5 Bank Stocks Facing the Biggest Legal Risks portfolio on Stockpickr.

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-- Written by Dan Freed in New York.

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