A couple of credit rating agencies are saying that JP Morgan Chase & Co.’s US$2.2 billion Enron settlement is no big deal.
Fitch Ratings notes, JPM will recognize a pretax charge against second-quarter 2005 earnings in the amount of approximately US$2 billion, likely resulting in a net loss for the quarter. Nevertheless, the bank has indicated that it expects its regulatory Tier I capital ratio to remain within the firm’s targeted range of 8.0% to 8.5%.
“This settlement, assuming it is approved by the lead plaintiff in the suit, will close a significant chapter in the Enron saga, significantly reducing the financial uncertainty associated with the outstanding litigation for JPM,” Fitch says, although it notes that individual legal claims nevertheless remain outstanding.
“This charge is expected to flow through JPM’s investment bank business sector, a unit already expected to be challenged by the difficult trading environment this quarter,” Fitch adds. Still, it maintains a positive outlook on the firm, reflecting its “longer term expectation that the work being done to improve efficiency, build revenues, and settle various legal uncertainties, combined with JPM’s broad and diverse franchise, should combine to strengthen the company’s credit profile in the future”.
Also, Standard & Poor’s Ratings Services said today that the recently announced settlements by JP Morgan and Citigroup Inc. of the most significant piece of outstanding Enron-related litigation (for $2.2 billion and $2.0 billion, respectively), are positive news from a number of perspectives.
“The settlements were well within the amounts that Standard & Poor’s had believed possible and will not result in any rating actions,” says Standard & Poor’s credit analyst Tanya Azarchs. However, JP Morgan, which added to reserves (as opposed to Citigroup, which did not), will report a very poor second quarter given that trading income will be weak and merger costs could be high, relative to those of the first quarter.
The settlements are significant for a number of reasons, S&P says. For one, they signal that the largest case facing financial institutions, the Newby class action suit, will soon be behind them, as the plaintiffs’ lawyers seem willing to settle quickly before the trial. It predicts that the other institutions named in the case, Merrill Lynch & Co. Inc. and Credit Suisse Group, are likely to settle in the near future as well, in its opinion. “In part, this is because it appears that those institutions that settle early get a better deal than those that continue to press their defense.”
Other Enron-related litigation, which remains outstanding, includes individual suits that are relatively minor, S&P says. In addition, Citigroup has a suit relating to some structured finance issues. Mutual fund-related, initial public offering allocation, and analysts’ research conflicts of interest cases do not have the same potential for multibillion dollar settlements, it adds. The only other major litigation facing Citigroup and Bank of America Corp. is the Parmalat case.
Also, S&P says the settlements were for a lot less than it had expected. “In particular, they were not more than the WorldCom settlement reached several months ago,” it notes.
Remaining reserves after the Enron settlement are still substantial, at about $4.6 billion for Citigroup and $3 billion for J.P. Morgan. “We expect that at this point there will not be further significant increases to reserves for these banks,” it says.
“On the whole, the favorable settlements, however painful they may be, signal what appears to be a turn in the legal environment away from the very aggressive pursuit of bankers on grounds that they are responsible for the ways in which their clients use the products they sell. Several other smaller cases with regard to alleged mutual fund trading irregularities and broker malfeasance have gone favorably for the banks as well,” S&P concludes.
JP Morgan remains on target
US$2.2 billion fine reduces uncertainty, Fitch says
- By: James Langton
- June 15, 2005 June 15, 2005
- 15:59