Quick Thoughts: Cost of BAC Settlement Meaningfully Below Headline Figure


While the headline for the mortgage settlement announced today with the Department of Justice is $17bn ($9.65bn in cash, of which $5bn is penalty and the balance remediation expense, and $7bn in consumer relief), the Q3 after-tax charge will be just below $5bn given the effects of tax and pre-existing reserves

The cost to BAC of the on-going consumer relief is likely to be at most 50% of the headline figure of $7bn, and possibly substantially less, given many of the actions (such as loan forgiveness) are part of the normal course of business (particularly given BAC has until August 2018 to disperse the relief) and others (such as loans to distressed areas) might not have occurred in the normal course but will come at no cost or a cost which is a fraction of the “credit” earned by BAC towards its consumer relief obligation.

Given the charge, we forecast a loss for Q3 of around $1.5bn (or 13 cents/share). There is negligible impact on capital ratios with the CET1 ratio falling 20 basis points to 11.8%, and we expect BAC to ask for, and get, permission for a $4bn stock buyback in the March 2015 CCAR round (as it did in the March 2014 CCAR but then withdrew after reporting in late April a $4bn error in its calculation of regulatory capital).

Given this, we see no reason that the stock will not return, during or before March 2015, to the $18 level it reached in late March 2014.

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