How Bank of America Can Shrug Off a $12 Billion Settlement

Nailing this settlement with the Justice Department would remove a dead weight on Bank of America shares

Jun 6, 2014 at 10:15AM
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After hitting another record high yesterday -- the seventh in the last eight trading sessions -- U.S. stocks are higher still on Friday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.3% and nearly 0.4%, respectively, at 10:18 a.m. EDT. The Labor Department's employment report for May, released this morning, is positive: Payroll additions came in at 217,000, in line with the 213,000 consensus estimate, for a fourth-straight month of gains above 200,000. The latest gains also have a symbolic significance, as the U.S. economy has recouped the 8.7 million jobs destroyed during the recession (none too soon!).

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For Bank of America (NYSE:BAC), it's another day, another multibillion-dollar settlement -- or nearly so. The megabank is reportedly in talks with the Justice Department to extinguish a civil investigation regarding the misselling of mortgage securities (what else?) with a $12 billion settlement paid via a cash fine and homeowner relief. Bank of America only just put to bed a similar investigation by the Federal Housing Finance Agency in March for the tidy sum of $9.5 billion.

The Financial Times has drawn up a league table of ignominy, ranking banks by total fines and settlements paid since January 2009. Even before including any estimate for this latest settlement, Bank of America topped the list with a staggering total of $26.4 billion, followed by JPMorgan Chase (NYSE:JPM) ($26.0 billion) and Wells Fargo (NYSE:WFC) ($8.2 billion).

Note that the "league table of ignominy" -- my expression -- is a misnomer. Indeed, more so than a fundamentally corrupt core, the ranking reflects that these three institutions were solid enough to acquire failing banks and lenders during the crisis (the targets were certainly corrupt or grossly mismanaged). Bank of America actually bit off a bit more than it could chew with Countrywide Financial and Merrill Lynch; without a double dose of government assistance, these targets might have taken the bank down with them.

But back to the latest settlement: The $12 billion figure that is being reported exceeds BofA's total profit last year of $11.4 billion – the highest annual profit in six years. Why, then, are the shares (up nearly 0.7%)  outperforming the broad market and the banking sector this morning? As BofA CEO Brian Moynihan told an investor conference last week, "Of the big stuff, that's [the Justice Department settlement] really the big one." The market abhors uncertainty. In this realm, big settlement numbers are not good, of course, but they are better than having an unknown number hanging over one's head.

Furthermore, at 0.7 times book value and 9.8 times forward earnings (per Morningstar), Bank of America continues to offer adequate value. The same can be said for several of its direct peers (particularly Citigroup) -- but not, conspicuously, of many other parts of this "one-way" market.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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