Should You Buy This Bank Stock Before Its Legal Problems End?

Lawyers must love JPMorgan Chase . The banking giant seems constantly bombarded with lawsuits. While competitors like Bank of America and Wells Fargo have had their share of court cases, JPMorgan seems to be the most pursued. But when the company's legal worries wane, its shares could truck higher. Should investors be planning for a JPMorgan rebound now? Let's take a look.

JPMorgan Chase: Legal woes overshadow a solid business
JPMorgan's courtroom activities appear never-ending. Recently, on December 19th, it was reported that the bank was being sued by the state of Mississippi for violating several provisions of the Consumer Protection Act while collecting credit card debt from customers. Earlier, on December 10th, we saw that JPMorgan and federal authorities might be nearing a settlement over the bank's ties to Ponzi scheme operator Bernie Madoff. These revelations come less than two months after the financial giant agreed to settle with the U.S. Department of Justice. Its $13 billion deal being what the government agency called "the largest settlement with a single entity in American history."

JPMorgan's Jamie Dimon Source: Steve Jurvetson.

While the publicized legal troubles help quell any enthusiasm JPMorgan investors hope to muster, JPMorgan's reported net loss of $0.4 billion for the third quarter of 2013, compared with net income of $5.7 billion in the third quarter of 2012, only increased the anxiety.

But looking beyond the headlines, JPMorgan's business is doing quite well. Net income, after excluding legal expenses and uncommon credit quality profits, came in at a solid $5.8 billion last quarter, flat year over year. Good news, like the company's 10% jump in consumer banking deposits and credit card sales reaching a record volume, was completely overshadowed by a huge $9.15 billion pre-tax litigation-related charge.

How much are the legal problems hurting JPMorgan shares? On a normalized earnings basis, a good amount, it seems. The company's yearly normalized results, or results to be expected when all non-typical costs or gains are excluded, look to be roughly $92 billion in revenues and about $20 billion in cash earnings. Cash earnings basically being net income plus non-cash charges such as depreciation and amortization adjusted for expected capital expenditures. Currently trading at about 10.8 times normalized cash earnings, JPMorgan stock appears to be valued at a noticeable discount to peers.

Bank of America: Getting market support despite some troubles
Bank of America could be considered a JPMorgan peer. This large financial institution has its own legal concerns. The City of Miami and the City of Los Angeles have both recently brought lawsuits against Bank of America for discriminatory mortgage lending practices. Though the bank has closed some noteworthy cases by agreeing to a $132 million settlement with the Securities and Exchange Commission and making a deal with residential mortgage guarantor Freddie Mac for $404 million.

While some courtroom issues may continue, the comapny's underlying business seems to be doing fine. Bank of America reported net income rose to $2.5 billion in the latest quarter, up from $340 million a year earlier. Better investment-related income helped offset lower mortgage banking revenues, with the biggest boost coming from a $1.5 billion reduction in loan-loss expense thanks to improved credit quality.

The company's administrative cost structure does hinder profitability, however. Bank of America has initiated "Project New BAC" in response. This enterprisewide program hopes to improve efficiencies in all areas of the company and meet a $2 billion quarterly expense reduction target by early 2015. So far, the program is on track.

The stock market seems to be already pricing in much of the cost-cutting project's success while dismissing any meaningful legal trouble. Assuming Bank of America's normalized revenues are about $86 billion with cash earnings of $12 billion, its shares look to be trading at around 13.8 times cash earnings. Near the industry average.

Wells Fargo: A booming business at this banking leader
Wells Fargo, another large financial services provider, doesn't seem to have much litigation activity but still hasn't gotten away unscathed. Wells was named in both the Miami and Los Angeles discriminatory lending suits, and the Department of Justice has accused the bank of misleading the Department of Housing and Urban Development about certain loans. The bank also reached a $335 million settlement with the Federal Housing Finance Agency recently.

Helped by its moderate legal involvements, business seems to be flourishing. Wells Fargo reported record net income in the last quarter, up 13% from 2012. Average loan growth rose almost 4% and average core deposits climbed 5%. A reduction in loan loss expense of around $1.4 billion, thanks to improvements in residential real estate pricing, more than offset a $900 million drop in revenues due to reduced mortgage activity.

Wells Fargo's accomplishments seem to be reasonably valued in the market with its stock trading at 2 times tangible book value and roughly 13 times earnings based on normalized revenues of $82 billion and cash earnings near $18 billion. The slight multiple discount probably due to hesitancy over Wells' meaningful exposure to real estate, which makes up about 55% of all loans outstanding.

Looking ahead
JPMorgan Chase has been consistently battered by lawsuits, and its shares have been pressured by the onslaught. Eventually, the company's legal entanglements will wane, and the stock market will likely revalue the company positively when that happens. Appearing to trade at a discount to peers currently, investors may want to begin planning for a possible JPMorgan bounce well before the market makes its move.

One looming problem
The traditional bricks-and-mortar bank will soon go the way of the dodo bird -- into extinction, that is. This sounds crazy, but it's true. Every single one of the nation's biggest banks are dramatically reducing branch counts and overhauling the ones left behind. But despite these efforts, they're still far behind a single and comparatively tiny lender that's already leapt into the future. Since the beginning of 2012 alone, this company's shares are already up more than 250%. And they're bound to go higher. To download our free report revealing the identity of this stock, all you have to do is click here now.

The article Should You Buy This Bank Stock Before Its Legal Problems End? originally appeared on

Bob Chandler owns shares of JPMorgan Chase. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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