To say that financial institutions in the United States have had a wild ride over the past few years would be an understatement. Our nation’s banks have encountered a myriad of hurdles during and after the 2008-2009 financial crisis that nearly brought our very financial system to its knees. In the aftermath of the recession, banks have had to overcome problems ranging from the LIBOR scandal to massive trading losses.
Now, it has become known that many of America’s largest banks are looking at gigantic legal tabs as a result of these issues. For example, Citigroup Inc. (NYSE:C) recently had to pay a massive sum to settle damage claims, and it’s not the only bank shelling out huge amounts of money to put out its legal fires. At first glance, it looks like our nation’s financial institutions are on their way to solid financial footing. Are the mounting legal bills simply another worry the banks can overcome? Or, on the other hand, should you take the news as a sign to stay on the sidelines and avoid the banks?
Lawyers aren’t cheap
In March, Citigroup Inc. (NYSE:C) agreed to pay more than $700 million to settle claims that it had misled investors in dozens of bond and preferred stock offerings. This agreement was made to settle a class action lawsuit brought against the bank on behalf of investors who purchased the securities between May 2006 through November 2008.
In total, the largest U.S. banks, including Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), and Wells Fargo & Co (NYSE:WFC), have forked over more than $60 billion to settle claims stemming from the credit crisis over the past few years, according to the Wall Street Journal. Furthermore, the legal bills aren’t expected to stop any time soon. The biggest U.S. banks are expected to pay almost $25 billion more in additional payments for flawed mortgages.
These banks keep on fighting
Investors have long hoped that Citigroup Inc. (NYSE:C) could finally put its financial crisis-related woes behind it and progress toward more solid financial footing. Unfortunately, Citigroup reported fourth-quarter results that widely missed expectations and underscored the company’s difficulties. During the quarter, Citigroup Inc. (NYSE:C) earned $2.2 billion, or $0.69 per share. Analysts had expected net income of $2.9 billion, or $0.96 per share.
That being said, shares of Citigroup Inc. (NYSE:C) are on a tear, rising nearly 20% over the past 52 weeks. That’s got to be an encouraging sign to investors that the market is confident in the company’s direction.
Last year, JPMorgan announced a huge $6.8 billion trading loss nicknamed the “London Whale.” The stock went from $46 per share in early April to $30 per share two months later. However, the London Whale aside, the bank reported solid fourth quarter results: revenues rose 10% on the strength of a 33% increase in mortgage originations. Earnings per share of $1.40 handily beat estimates of $1.16. Moreover, the stock has recovered admirably over the past year, rising steadily to its current level near $50 per share.
Bank of America Corp (NYSE:BAC), meanwhile, has paid more than $50 billion in mortgage-related legal fees to settle disputes made against its subsidiary Countrywide, which it acquired just before the financial crisis. These settlements caused the bank’s fourth quarter earnings to shrink to $0.03 per share. However, analyst expectations were for only $0.02 per share. At the same time, revenue fell by more than 25% from the year-ago period.
That being said, Bank of America Corp (NYSE:BAC) has reported a number of positive catalysts recently, in addition to the company posting better-than-expected earnings. Bank of America Corp (NYSE:BAC) recently announced that the company’s Board of Directors authorized the repurchase of up to $5.0 billion of common stock and the redemption of approximately $5.5 billion in preferred stock. Bank of America Corp (NYSE:BAC) is extremely confident in its capital structure, and these moves demonstrate its intention of returning excess cash to shareholders.
Wells Fargo arguably performed the best of the nation’s big banks last year. The nation’s biggest mortgage lender reported record fourth-quarter net income that handily beat earnings expectations. Full-year net income was up 19% year over year, and earnings per share for the entire year came in at a record $3.36. Revenue for the fiscal year clocked in at over $86 billion, up 6% from the prior year.
The best of the bunch
The mounting legal fees the banks have shelled out to settle claims and damages represent huge sums of money, but it appears that the market is not overly concerned. Bank shares have rallied significantly in recent months, as profitability and dividend payments return to our financial institutions. It finally seems like our nation’s biggest banks are getting their businesses back on track.
In particular, JP Morgan Chase and Wells Fargo appear to be the banks in the most solid financial positions. The London Whale, while indeed significant, was a one-time issue that is resolved, and now JP Morgan Chase and its investors can move forward. In addition, the stock trades for a very attractive trailing price-to-earnings ratio of 9, which compares favorably to Citigroup’s 18 P/E and Bank of America’s 48 P/E. Moreover, JP Morgan Chase pays a hefty dividend yield of 3%.
Wells Fargo, meanwhile, is one of the safest of the large American banks. The company increased its dividend payout 16% in January, and the raise reflects the company’s confidence in its performance as well as its commitment to returning cash to shareholders. At its current level of $1.00 per share, the dividend yields almost 3% at recent prices. Moreover, Wells Fargo is a bank that doesn’t take huge lending risks, doesn’t have a massive trading business, and has a growing dividend. As a result, investors looking to buy bank stocks should give preference to JP Morgan Chase and Wells Fargo.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo.
