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Summary

  • Bank of America's litigation issues have been a major headwind for shares over the past few quarters.
  • Uncertainty surrounding litigation issues has been abated somewhat by information in the most recent 10-Q.
  • This reduction in uncertainty should be a major catalyst for shares in 2014.

The past few weeks have been very unkind for Bank of America (NYSE:BAC) shareholders. The unpleasantness with the now-famous capital calculation blunder, coupled with ongoing nightmare of litigation issues has sent shares tumbling from $18 to less than $15 as of this writing. We won't rehash those issues here, but hidden in the company's most recent 10-Q is a glimmer of hope for shareholders; a reduction in estimated legal liabilities.

In the company's 10-K, filed in late February, the bank disclosed a high-end estimate of legal losses above its then current reserves of $6.1 billion. However, the 10-Q reports that the high-end estimate for losses above reserves has fallen to $5 billion. While that is still an enormous amount of money, the fact that estimated legal losses are coming down is huge, in my mind. One of the main reasons investors have been scared off from BAC shares over the past several quarters is the seemingly never-ending parade of litigation that has destroyed shareholder wealth since the financial crisis. With the realization that the worst is over with, I think investors are overlooking a very important catalyst for shares to move higher, or at least stop going down.

It's a known fact that investors do not tolerate uncertainty, and in the case of BAC, the uncertainty surrounding just how much shareholder capital would be litigated away was a major headwind for shares. However, with legal liability estimates now coming down, I think this could be a major catalyst for shares to move higher in the coming months. While moving an estimate down "only" $1.1 billion isn't necessarily a huge impact financially, it does send a very important signal to investors that BAC thinks it is out of the worst part of the litigation cycle and that it can begin to move on.

Now, while I love this disclosure from BAC, the worst thing that could happen is that it reverses course in the coming months and raises the estimate back up. If that were to happen, we'd probably see a fresh sell-off on fears that not only is BAC on the hook for more losses, but also that it has no ability whatsoever to forecast its potential liabilities. This would reintroduce the very thing that investors are afraid of, uncertainty, and magnify an already adverse situation. Hopefully, it won't come to that and we can all move on.

This disclosure is terrific, if not for the financial impact, but the simple fact that BAC sees a light at the end of the tunnel in terms of litigation. The company is making plenty of money, but when billions of dollars are flying out the door and into government and attorney hands each quarter, it is tough to build shareholder wealth. If BAC is right and the worst of the litigation is over, that is a huge development that I think was overlooked by the market, since it was buried in the 10-Q. But don't underestimate the impact of reduced uncertainty, as it could be a major catalyst for shares in 2014.

Source: Bank Of America: A Major Upside Catalyst Emerges For 2014