Bank of America Corp's (BAC.N) financial crisis hangover is lasting longer than expected, leading some investors to wonder if the massive litigation expenses being incurred have become a recurring cost of doing business instead of being dismissed as one-time items.
The bank on Wednesday posted $6 billion of litigation costs for its first quarter, far exceeding the $3.7 billion of settlement costs that investors had previously known about.
Since the 2008-2009 financial crisis, Bank of America has announced some $50 billion of settlements, before taxes. Without those charges, its income before taxes would have been about three times higher.
It has posted more than $1 billion of expenses from announced and expected settlements, excluding its lawyer fees, in eight of the last seventeen quarters, and in some quarters many times that number. Litigation expenses in four of the five quarters since the start of 2013 have exceeded $1 billion.
"It's almost like these guys have become the tobacco industry," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel, in reference to payments by cigarette makers to settle lawsuits. "It becomes a constant irritant, these things just don't seem to go away," McCormick added. Bahl & Gaynor, which manages more than $11 billion, does not invest in Bank of America shares.
Bank of America declined to estimate on Wednesday how much additional settlement costs may total beyond what it has already set aside.
The expenses stem mainly from mortgages that Countrywide Financial Corp made during the housing boom and sold to investors. Bank of America bought Countrywide in July 2008, just as the mortgage collapse was triggering the crisis.
Bank of America has resolved most of the outstanding litigation with investors, including most of their demands that the bank buy back bad mortgage bonds. The bank is now focusing on settlements with the U.S. Department of Justice and other enforcement agencies.
On a conference call on Wednesday, analysts pressed Bank of America's Chief Financial Officer Bruce Thompson to indicate when the bank will stop piling up big litigation costs.
Thompson said the bank has worked through many of its outstanding issues, but he added, "I think we need to be realistic ... it is very hard to predict."
His response was more subdued than in October 2013, when he said on a conference call with investors: "I think at this point relative to our peers we have tried to be out front and get through some of the larger settlements that we have."
The pain may continue longer than investors had hoped, but Bank of America's legal expenses will at some point start to subside as it works through the crisis-era matters still in litigation.
"Eventually it's going to be over. It's almost like a bad loan you're writing off" that will bottom out some day, said David Ellison, a portfolio manager at Hennessy Funds, which holds Bank of America shares.
Legal expenses have been an issue for all Wall Street banks since the financial crisis, but Bank of America has been hit particularly hard.
In December 2013, research firm SNL Financial tallied total credit crisis and mortgage-linked settlements for the biggest U.S. commercial and investment banks. Bank of America had generated more than half of the total. JPMorgan Chase & Co, (JPM.N) the next biggest on the list, was responsible for about 30 percent.
Higher legal bills have undermined the cost-cutting initiatives introduced by Chief Executive Brian Moynihan. Through the bank's Project New BAC program, it achieved $1.5 billion of quarterly cost savings by the end of 2013. But litigation expenses that year averaged $1.5 billion per quarter.
There had been signs the bank had been making progress in putting many of its legal troubles to bed at the start of 2014. In January, the bank received a New York judge's approval for a $8.5 billion settlement with investors over soured mortgage securities. The bank's $9.3 billion settlement with the Federal Housing Finance Agency in March resolved 88 percent of its total exposure to the mortgage bonds over which it had faced litigation.
Still, some money managers are getting impatient.
"When does it end? And how do you factor that into the way you value the company?" said Ken Crawford, portfolio manager for Argent Capital Management in St. Louis. Argent does not own Bank of America shares.
Investors traditionally try to value a company based on the earnings of its continuing businesses, and often ignore expenses that are seen as one-time or historical. For a long time, investors viewed mortgage-crisis costs as falling into the "historical" category.
That may be changing for Bank of America and perhaps even other banks, said Bahl & Gaynor's McCormick.
Bank of America brought much of this pain on itself, when it bought Countrywide in 2008. Brian Moynihan, who became the bank's chief executive more than a year after the deal closed, said in 2011, "Obviously there aren't many days when I wake up and think positively about the Countrywide acquisition."