For Bank of America's (BAC 0.43%) shareholders, it may seem there is no end to the bank's legal drama still lingering from the financial crisis. However, there may finally be a light at the end of the tunnel.
According to CEO Brian Moynihan, the only big settlement still hanging over the company may be over and done with pretty soon. Once the mortgage-related settlements are behind B of A, it may take a little while for the crisis to be forgotten, but it could signal a new era for the bank and its shareholders.
A lot has been paid already
Bank of America has already had to pay quite a lot, mainly related to bad mortgages originated by Countrywide Financial, which B of A acquired in 2008.
The company has already paid or agreed to pay more than $60 billion since 2011 to settle lawsuits, pay legal fees, and repurchase bad loans.
Just one more to go
While there are lots of cases that still need to be resolved; there is just one big one left to settle. The bank is working on a settlement with the U.S. Department of Justice that covers mortgage-backed securities sold by Bank of America under false pretense.
Basically, the DOJ alleges the securities were of much lower quality than they led investors to believe.
The Justice Department was originally seeking about $20 billion, but that figure included funds to go to the Federal Housing Finance Authority (FHFA), a case that was subsequently settled on its own. Even when backing out the $6.3 billion in cash Bank of America agreed to give the FHFA, it would still produce the largest settlement related to the financial crisis, which currently is JPMorgan's $13 billion settlement over similar issues.
However, it is important for investors to bear in mind a couple of things.
First, the original settlement offer in virtually any legal proceeding, including this one, is a somewhat inflated starting point for negotiations. The actual settlement amount is likely to be considerably less.
Don't worry too much about the pending legal bills
Also; Bank of America has been setting money aside to pay their legal expenses. This, as well as the previous settlements, came as no surprise to the bank. In fact, Bank of America revealed it had set aside an additional $2.4 billion for mortgage-related matters. The company hasn't said exactly how much it has set aside for this specific case, which makes sense given there are ongoing negotiations, but if the past few years are any indication, they'll more than be able to cover the tab.
What comes next for the bank?
Although this sounds like a ton of money, and it is, it needs to happen before the bank can truly move on from the crisis.
I've said before that every settled lawsuit makes Bank of America a stronger company, and this is the first definitive confirmation we've gotten that the end of all this drama is in sight.
As far as what could happen once the crisis is really in the past, and all of the pending legal payments are history, consider how cheaply Bank of America trades relative to its historic level. The stock currently trades at 1.2 times its tangible book value, and while it traded at a ratio of around four during the pre-crisis years, that was probably inflated due to investor over-optimism.
However, if we look back a few more years, we'll see that during the pre-housing bubble years, the bank traded for a ratio of about 2.5, which is certainly reasonable to expect once the uncertainty surrounding legal settlements is truly gone.
A valuation of 2.5 times tangible book would imply a share price of about $33. While we won't get there overnight, this is definitely a realistic target over the next few years.
Now that the bank can really put the past behind it, it can focus on building up its core business and realizing its potential. If the latest data on Bank of America's growth is any indication, it's already well on its way to doing just that.
