Bank of America: in reserve Premium

It is the opposite of the gift that keeps on giving. Legal problems stemming from the financial crisis – more than half a decade since the nadir – continue to take from Bank of America and its shareholders. In the first quarter, the bank swung to a loss of 5 cents a share, dragged down by $6bn of litigation expense, or 40 cents a share after taxes. Some of that was known – the bank in March unveiled a mortgage-related settlement with the Federal Housing Finance Agency that took a $3.6bn bite out of earnings. But BofA also added $2.4bn to its legal reserves in the quarter.

Since the crisis, the bank has paid settlements and set aside legal reserves totalling more than $58bn. That includes repurchasing (primarily from Fannie Mae and Freddie Mac) loans whose riskiness was misrepresented, lawsuits with the bond insurers, such as MBIA, government and regulatory claims, and non-mortgage related litigation. At the end of 2013, BofA estimated it could face up to $10bn of additional costs, but it is not known how much the FHFA settlement, and the reserves added last quarter, will affect that. There are ongoing investigations by the Department of Justice among others.

Over the past year, BofA’s shares, up 32 per cent, have outperformed other US banks. BofA has a higher price to earnings multiple than JPMorgan, for instance. BofA has made progress working through its troubled loans. As legal expenses rose this quarter, the cost of servicing legacy real estate loans fell by $1bn from a year ago to $1.6bn. Fixed income trading revenue fell 15 per cent – the least worst result so far on Wall Street in a tough start to the year. And BofA is seen as a prime beneficiary of an improving US economy and the ensuing loan and margin growth. But this quarter is a painful reminder of the lingering legal woes that keep on taking.

Email the Lex team in confidence at lex@ft.com

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.