Big Six U.S. Banks' 2013 Profit Thwarted by Legal Costs

Bloomberg

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Wall St and Broad St street sign in NYC
Wall St and Broad St street sign in NYC

Combined profit at the six largest U.S. banks jumped last year to the highest level since 2006, even as the firms allocated more than $18 billion to deal with claims they broke laws or cheated investors.

A stock-market rally, cost cuts and a decline in bad loans boosted the group's net income 21 percent to $74.1 billion, according to analysts' estimates compiled by Bloomberg. That's second only to 2006, when the firms reaped $84.6 billion at the peak of the U.S. housing bubble. The record would have been topped were it not for litigation and other legal expenses.

Wall Street's largest banks, set to report fourth-quarter earnings starting Jan. 14, are contending with fresh accusations they misled buyers of mortgage-backed securities, rigged markets or turned a blind eye to suspicious activity by customers. JPMorgan Chase chief executive officer Jamie Dimon, whose company announced more than $23 billion in settlements of government and private disputes in the past 12 months, has said legal expenses at his firm will remain high.

"Legal-related costs significantly impacted results in 2013, and we think they'll stay elevated in the near term," Jason Goldberg, a New York-based analyst at Barclays Plc, said in a telephone interview. "Banks will try to get a lot done in year-end results to have less of a burden in 2014."

Surpassing JPMorgan

JPMorgan and Wells Fargo, the first to post results, will show the impact U.S. scrutiny is having on Wall Street.

Wells Fargo, the fourth-largest U.S. bank, is set to announce the biggest annual profit, surpassing JPMorgan's for the first time since 2009, according to analysts' estimates. Net income at San Francisco-based Wells Fargo, which relies most on retail banking and mortgage lending, is predicted to climb 4.1 percent in the quarter to $5.3 billion. For the year, analysts estimate about $21 billion, a fifth straight annual record.

JPMorgan, the nation's biggest bank by assets, will probably say profit slid 14 percent to $4.9 billion, according to analysts. The firm's annual profit may drop 21 percent to $16.9 billion, snapping three straight years of records.

The bank agreed this week to pay $2.6 billion to resolve criminal and civil allegations it failed to stop Bernard Madoff's Ponzi scheme, a deal JPMorgan said will cut fourth-quarter earnings by about $850 million. In November, it reached a record $13 billion settlement of probes into mortgage-bond sales. The New York-based firm also resolved inquiries last year into botched derivatives bets, energy-market manipulation and credit-monitoring products.

Legal Expenses

JPMorgan allocated $11.1 billion to litigation and legal costs during the first nine months of 2013, the most among the six lenders, according to quarterly reports banks filed with the Federal Reserve. That compared with $4.8 billion at Bank of America and $1.4 billion at Citigroup.

The six banks' combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7 billion, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413 million, and Morgan Stanley, which reported a 14 percent decline to $211 million.

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