The broad indexes all ended lower, however the KBW Banking Index was up slightly to close at 66.33, following the announcement by New York State Attorney General Eric Schneiderman of the expected landmark $13 billion mortgage settlement between JPMorgan Chase (JPM) and multiple government authorities, including the Department of Justice.
Schneiderman heads President Obama's Residential Mortgage-Backed Securities Working Group. At a press conference Tuesday afternoon in New York, he confirmed the settlement would include $4 billion in assistance to distressed homeowners. He added that the settlement would cover all civil claims by government authorities related to residential mortgage-backed securities (RMBS) sales by JPMorgan, Bear Stearns and Washington Mutual before 2009.
JPMorgan acquired Bear Stearns when the investment bank was faced with bankruptcy after its liquidity dried up in March 2008. Washington Mutual failed in September 2008, after which it was sold to JPMorgan by the Federal Deposit Insurance Corp.
One of the major sticking points during the weeks leading up to the settlement was the specific language JPMorgan would use to admit wrongdoing. "JPMorgan acknowledged it made serious, material misrepresentations to the public -- including the investing public -- about numerous RMBS transactions," Schneiderman said.
The settlement will include $9 billion in cash payments by JPMorgan, including "a $2 billion civil monetary penalty and $7 billion in compensatory payments," according to the bank.
The settlement also includes $4 billion in assistance to distressed homeowners. The assistance will include $2 billion in principal write-downs, as well as $2 billion in "financial relief for borrowers and communities," including refinancing mortgage loans at lower rates, donation of repossessed properties, and "new mortgage loans to low-and moderate-income families harmed by the financial crisis," according to the New York State Attorney General's Office.
JPMorgan said in a statement that it was already "fully reserved" for the settlement. JPMorgan CEO James Dimon in the company's press release said he was "pleased to have concluded this extensive agreement with the President's RMBS Working Group and to have resolved the civil claims of the Department of Justice and others. Today's settlement covers a very significant portion of legacy mortgage-backed securities-related issues for JPMorgan Chase, as well as Bear Stearns and Washington Mutual."
JPMorgan's shares were up 0.7% to close at $56.15.
Bank of America
Shares of Bank of America have returned 31% this year. The shares trade for 11.3 times the consensus 2014 earnings estimate of $1.34 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $1.60.
The stock's forward price-to-earnings ratio is higher than those of the other members of the "big four" U.S. banking club, which also includes JPMorgan Chase, Wells Fargo (WFC) and Citigroup (C). However, the shares are trading for a relatively low 1.1 times their reported Sept. 30 tangible book value of $13.62. Another major positive factor for the shares is the expected 80% growth in earnings from the consensus EPS estimate of 89 cents for 2013 to $1.60 in 2013.
Another positive development Bank of America shareholders can look forward to is a greater return of capital next year. KBW analyst Frederick Cannon in a client note on Nov. 3 estimated Bank of America following the next rounds of Federal Reserve stress tests in March will increase its quarterly dividend to 5.75 cents from 1 cent. He also estimated that Bank of America's dividends paid to investors from the second quarter of 2014 through the first quarter of 2015 would total $2.600 billion, with share buybacks totaling $5.185 billion.
Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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