These days, the job of a bank analyst is even more thankless than usual. Banks already publish the most impenetrable financial statements in the corporate world, making assessments of their earnings potential and balance sheet strength a herculean task. And just when you think you have a handle on things, yet another big scandal rears its head and wrecks your forecasts.
Today it was BNP Paribas’s turn to thwart expectations. Analysts predicted it would report €1 billion ($1.4 billion) in net profits for the fourth quarter, but France’s largest bank instead recorded quarterly earnings of only €127 million, a 75% plunge from the previous year. This was thanks to a whopping $1.1 billion provision it set aside to cover a potential legal charge relating to its alleged handling of payments between parties subject to US sanctions.
Big banks have paid more than $5 billion in anti-money laundering settlements over the past few years; the most recent a $100 million fine for RBS last December and the largest a $1.9 billion settlement by HSBC a year earlier. The fines generally stemmed from payments made on behalf of customers in some combination of places like Iran, Libya, Sudan, Myanmar, and Cuba. HSBC’s record-setting fine also involved processing payments for Mexican drug cartels. If BNP Paribas ends up getting hit for something close to the amount it set aside last quarter, it would be the second-largest such money-laundering-related fine on record.
In recent weeks, “unexpected” legal charges have also dented profits at Credit Suisse, Deutsche Bank, and Lloyds Banking Group. A global probe in foreign-exchange market manipulation could sting a number of banks this year. In case it isn’t clear by now, the dense legal disclosures in banks’ financial statements are not mere boilerplate; billions of dollars in settlements and provisions likely lurk in these pages.
Banks like to flatter their financial results with a dizzying array of adjustments to strip out “non-core” business units, currency fluctuations, and a host of other inconvenient expenses. The depressing regularity with which big banks now find themselves saddled with chunky legal charges means that “core underlying scandal-adjusted earnings” may soon become a line-item in bank reports, or analysts should simply trim their earnings forecasts by a few hundred million dollars every quarter—maybe make it a billion, just to be safe.