It seems almost inevitable these days that banks will be in the news for legal issues. This is certainly true at the moment, and this will pull down several stock prices. Especially with larger cases, lawsuits can result in major losses that will limit the company's cash flow. While a variety of banks have been in the news for legal trouble lately, I will focus more on five specific bank stocks for now. The legal news has been bad for JPMorgan Chase (JPM), U.S. Bancorp (USB), Royal Bank of Scotland Group (RBS), Barclays (BCS) and Wells Fargo (WFC). Some banks are in worse shape than others, but all will face some difficulty due to the recent legal news. In this article, I will focus on how these legal difficulties are affecting each bank, and what this means for investors currently holding or looking to buy these stocks.
JPMorgan is currently trading around $36, has an operating cash flow of $106.18 billion, and has a price/book ratio of 0.76 at the moment. While its stock price rose in the month of June, it has begun July poorly, and I believe this trend will continue.
As many already know, JPMorgan has been dealing with investigations related to its major trading loss. The Federal Reserve is still looking into the size of the growing loss, and some estimates are now as high as $9 billion. JPMorgan remains optimistic about the future, as it does not expect losses to continue in the future. This is becoming old news, furthermore, so it should not have a huge effect on the stock. It is still important, however, as it shows that the company is already dealing with major financial losses and drops in investor confidence.
Within this context, it may be particularly bad for JPMorgan that legal trouble might be on the way. The U.S. Federal Energy Regulatory Commission (FERC) is currently investigating JPMorgan due to its possible manipulation of the power market to inflate payments on electricity. The situation does not look good for JPMorgan at the moment, as the FERC claimed, "Three of the bidding techniques had together resulted in at least $73 million in improper payments." This is in addition to the investigations from the Securities and Exchange Commission and Justice Department over the trading loss. As the legal situation for JPMorgan continues to worsen, I think the stock price will be falling once again. With this in mind, I do not recommend this stock, and I think it is one of the worst bank stocks amongst the five I am currently reporting on.
U.S. Bancorp has been hovering around its 52-week high for the past two months, and it is currently trading around $33. It has an operating cash flow of $6.68 billion, and it has a price/book ratio of 1.91. With its stock price so high at the moment, there is little reason to buy it, especially with its recent legal difficulties.
U.S. Bancorp is not in the worst position, but it has recently taken a hit, as it paid $55 million to settle an overdraft fee case. This is obviously not great news for the company, but it not so awful either. This case was part of nationwide litigation against 35 lenders. Customers accused banks of ordering overdraft fees of the largest values first, rather than going in chronological order. Fourteen banks have already settled, and U.S. Bancorp's is quite minor in comparison to some of the others. Bank of America (BAC) had the largest settlement at $410 million, and several other settlements exceeded $100,000, including those from Royal Bank of Scotland and JPMorgan. In comparison to others, therefore, U.S. Bancorp's legal news is not so bad. Its current price is quite high though, so slightly bad news like this could still bring down the stock.
Royal Bank of Scotland stock has fallen quite a bit in the past week and a half, and it is currently trading around $7. I do not think it is in a place to reverse this trend either.
The Crown Office has been investigating banks in Scotland for some time now, but this investigation has recently been made public due to "recent developments." There has been some speculation that this relates to how Royal Bank of Scotland dismissed up to ten traders in its scandal of fixing Libor, which is an "international interest rate that is used to set borrowing costs for millions of businesses, consumers and investors." It was one of several banks allegedly involved in presenting lower readings of Libor, as this would make the banks seem like they would be better to lend to. This will likely hurt Royal Bank Scotland more as the criminal investigation continues to develop. I would not recommend this stock, at least until more develops with this troubling legal situation.
Barclays has an operating cash flow of $63.83 billion, has a price/book ratio of 0.38, and it is currently trading around $11. The stock has generally been on a downward trend since March, and the recent news will not help it with this.
While Royal Bank of Scotland may eventually face problems from the Libor scandal, Barclays is already having trouble. It has been fined $455 million for "rigging the benchmark for more than $360 trillion of securities," and its CEO resigned due to political pressure with this scandal. The fine has already put Barclays in a weaker position, and without its CEO, it will likely have even more rebuilding in its future. I consider Barclays the worst stock of the ones I am currently reviewing, and I would not recommend investing in it.
Wells Fargo has an operating cash flow of $12.36 billion, and it has a price/book ratio of 1.32 at the moment. It is currently trading around $33, which is near its 52-week high of $34.59, so I do not see a lot of room for this stock to rise. It is not in as bad of a position as some of the others, but this will still limit its potential.
Wells Fargo's Evergreen Investment Management Company has agreed to settle a class-action lawsuit regarding an old mutual fund that was allegedly invested in risky mortgage-backed securities. It will pay $25 million, but this is not such a huge loss for the company. As this case pertains to a fund that no longer exists, furthermore, it should not have future ramifications on the company. Due to its high price, I still would not recommend investing in Wells Fargo, but this news should not have too negative of an effect on it.
Wells Fargo and U.S. Bancorp have the least troubling legal news, as they have settled for relatively low amounts. These two are quite expensive though, so I still would not recommend investing in them. JPMorgan and Royal Bank of Scotland are facing some new legal trouble, so I would not recommend investing in them either. The one I believe is in the worst position at the moment, however, is Barclays. To put it simply, do not invest in this stock until the current mess of a situation changes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
