April 16, 2014 12:23 pm

BofA hit by $6bn legal charge

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Bank of America reported its first quarterly loss in almost three years as the bank set aside an extra $2.4bn to settle previously disclosed legal actions, including its talks with the Department of Justice’s mortgage task force.

The bank may have to pay at least $7.5bn in addition to the $9.5bn agreement it reached with the Federal Housing Finance Agency in March, people familiar with the matter said last month.

The DoJ is getting close to deciding on at least two investigations involving mortgage-backed securities including that of BofA’s, a person familiar with the matter said. Eric Holder, attorney-general, has indicated to staff he wants to move to the next phase soon, which would be either legal action or settlement, the person said.

JPMorgan Chase paid $13bn to settle its negotiations with the DoJ and state agencies. But BofA, which took a $6bn legal hit to earnings on Wednesday, has already settled with some parties included in JPMorgan’s deal, such as the FHFA and the National Credit Union Administration.

“When it goes into reserves, for BofA it tends to be a more near-term event than others,” said Glenn Schorr, analyst at ISI Group in New York. “Each of these banks is just having a lot bigger legal bills than any of us had anticipated one or two years ago.”

BofA is also waiting to hear its penalty on a case dubbed “the hustle” where it was found liable for civil fraud over mortgages sold to Fannie Mae and Freddie Mac. The government has asked for $2.1bn. The bank has already set aside $8.5bn for a settlement with investors represented by law firm Gibbs & Bruns.

Bruce Thompson, chief financial officer, declined to give details as to which future legal woes the new reserves related to, other than they would be used for “previously disclosed” litigation related to “legacy mortgage” issues.

The bank’s earnings for the first quarter were wiped out by the $6bn in legal expenses, with a loss of $276m widely missing analyst forecasts of a $833m profit. The loss compared with a profit of $1.5bn in the same period of last year.

Betsy Graseck, analyst at Morgan Stanley, wrote in a note to clients that the rise in reserves indicated “more settlements coming soon.”

Shares in the bank fell 1.6 per cent to close at $16.13.

“The cost of resolving more of our mortgage issues hurt our earnings this quarter,” said chief executive Brian Moynihan. “But the earnings power of our business and customer strategy generated solid results and we continued to return excess capital to our shareholders.”

The legal expenses were split between a $3.6bn charge related to its $9.5bn FHFA settlement and the $2.4bn of extra reserves to cover future payments.

Under Mr Moynihan, BofA has tried to put its large legal settlements behind it as it attempts to remove litigation uncertainty for investors. The bank inherited some of its biggest legal woes from its 2008 acquisition of mortgage lender Countrywide.

The bank said on Wednesday it had agreed a new $950m settlement with the Financial Guaranty Insurance Company and Bank of New York Mellon over the mis-selling of mortgage-backed securities. However, those costs were already covered by previous reserves.

Overall revenues at the bank fell to $22.7bn from $23.6bn a year ago, excluding the impact of a change in value of the bank’s own debt, adding to the trend of declining quarterly revenues across Wall Street.

Trading in fixed income, currencies and commodities fell 15 per cent – excluding a $450m write down a year ago. Including the charge, FICC revenue declined 2 per cent to $3bn. FICC revenues at JPMorgan Chase and Citigroup were down 21 per cent and 18 per cent respectively in the quarter from a year ago, reflecting the slower trading environment.

The bank cut its release of reserves, to cover bad loans, to $379m, compared with a release of $804m in the first quarter of 2013.

Mortgage banking revenues declined to $412m from $1.3bn in the quarter a year ago as originations fell to $8.9bn.

Global banking revenue – which includes BofA’s investment bank – rose 6 per cent to $4.3bn from $4bn a year ago on improved loan growth. Investment banking fees were flat at $1.5bn. Revenues also grew at the wealth management arm, totalling $4.5bn, a 7 per cent lift from a year ago.

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