Litigation: From exceptional items to a cost of doing business

Peter Lee
Published on:

The uncertainty for investors over bank litigation extends beyond hits to bank profits and so, potentially, their ability to pay dividends and service coupons on capital instruments and debt.

Morgan Stanley’s analysts have been trying to put some numbers on potential litigation expenses for large-cap US and European banks this year. The large banks it covers have already paid out around $230 billion in litigation since 2009, with Bank of America leading the way at an eye-watering $64.7 billion paid and $3.5 billion still reserved, in front of JPMorgan, which has paid $40 billion with another $6 billion still reserved.

The good news is that the worst might be behind them, particularly for the top five US banks, which have already paid the best part of $130 billion. Morgan Stanley calculates they might just have another $18 billion odd to pay – mere loose change, then.

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However, the top 20 European banks, which have already paid or reserved for payment about $105 billion in litigation, could end up paying a further $50 billion by 2016. The big outstanding cases would seem to be Barclays’ recently delayed settlement with US regulators on FX fines, estimated to reach around £320 million, and a possible further £1.5 billion for RBS and £1.3 billion for HSBC, also FX-related. UBS could pay around SFr2.1 billion from the last quarter of 2014 to 2016. The Morgan Stanley analysts’ base case for Deutsche Bank is another €3.8 billion by 2016.