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Bank of America, Citigroup Face Billions In Losses in Antitrust Case (Update 1)

Bank antitrust story updated with additional details in final paragraph..

NEW YORK ( TheStreet) -- Private antitrust litigation pitting some five million retailers against Visa (V - Get Report), MasterCard (MA - Get Report), and 13 large banks, including Bank of America (BAC - Get Report) and Citigroup (C - Get Report) has slipped under the radar of many analysts and investors who follow those companies, but the case may deliver a multi-billion dollar shock to bank bulls in the coming months.

Aside from Bank of America and Citigroup, the other banks that appear to have the most at stake as a result of the litigation in the U.S. Eastern District of New York are US Bancorp (USB - Get Report)and JPMorgan Chase (JPM - Get Report). All four face billions in potential losses.
For JPMorgan Chase, the implied cost would be $5.38 billion, more than five times the $1 billion the bank lost to Durbin, according to Deutsche Bank analyst Matt O'Connor.

Estimates of the potential cost of a settlement of the antitrust case vary dramatically--from a few billion dollars into the hundreds of billions. At least as worrisome to the financial companies, according to Deutsche Bank research, is the risk that a settlement or judge's ruling could take the 2% "interchange" fees banks and card companies charge retailers on credit card transactions to as low as .5%, That would equal the rate in Australia, but still be higher than the .3% charged in the European Union, according to a report by Sanford Bernstein analyst Rod Bourgeois.

The impact of such a change would be several times as costly as the Durbin Amendment, which caps fees banks can charge on debit cards and is one of the new rules most hated by the big banks.

According to a Jan. 4 report by Deutsche Bank analyst Matt O'Connor, reducing credit card interchange fees by 75% would cost US Bancorp about $1.2 billion of 2012 revenues--some four times O'Connor's estimate of revenue the bank lost from the Durbin Amendment, For JPMorgan Chase, the implied cost would be $5.38 billion, more than five times the $1 billion the bank lost to Durbin, according to O'Connor's estimate. For Bank of America, the implied cost would be $3.68 billion, nearly double the $1.9 billion O'Connor estimates the bank lost to Durbin. Citigroup, essentially unaffected by Durbin, would take a $3.02 billion hit if credit card interchange fees fell to .5%.

Spokespeople for Bank of America, JPMorgan, Citigroup and US Bancorp declined to comment.

The antitrust case is in many ways a sequel to a 1996 class action lawsuit led by Wal-Mart Stores (WMT - Get Report) and Limited Brands (LTD) against Visa and MasterCard. The settlement in that case included more than $3 billion in monetary damages, as well as changes in business practices worth $25 billion "conservatively," according to a Nov. 16 report by Deutsche Bank analyst Bryan Keane. Many antitrust experts believe it to be the largest antitrust settlement in history.
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