Banks may face more high-profile lawsuits such as the one U.S. prosecutors slapped on Bank of America for selling toxic mortgages to government mortgage companies, though low interest rates will affect the financial industry as well, said noted Wall Street analyst Meredith Whitney.
Also, expect banks to announce more layoffs as they seek to streamline and become more efficient, Whitney added.
Federal prosecutors filed a lawsuit against Bank of America, accusing the bank of costing taxpayers more than $1 billion in losses when it allegedly sold toxic mortgage loans to Fannie Mae and Freddie Mac.
The suit argued that Countrywide Financial, which Bank of America acquired, made the iffy mortgage loans from 2007 to 2009 without ensuring borrowers could pay them back.
More lawsuits may on the way, though other factors will affect banking stocks, such as Fed policies.
Low benchmark interest rates could hurt smaller banks, which aren't the beneficiaries of the Fed's monetary stimulus tools such as bond buybacks that pump liquidity into the financial system, a tool known as quantitative easing.
"I think it's just an overhang for the stocks," Whitney described the Bank of America suit on CNBC.
"There's so much more that is going into the stocks right now, the valuations of the stocks. You talk to most investors, they don't want to own financials."
The Federal Reserve has cut interest rates to near zero and has carried out repeated rounds of quantitative easing, under which the Fed buys assets like mortgage debt held by banks, pumping the financial system full of liquidity in the process to further ensure borrowing costs stay low and the economy and labor market recover.
The Fed is currently running a third round of quantitative easing (QE3) in which it will buy $40 billion in mortgage debt a month from banks until monetary authorities feel the economy has demonstrated marked improvement.
Such policies will hurt small banks especially because they can't make money from lending.
"Because interest rates are so low, they can't make money off of net interest margin. That shouldn't be a surprise, but for the regional banks it's harder because that's how they make money," Whitney said.
"For the big banks, they are huge beneficiaries of QE3, so it's a mixed message for the whole sector and I think it's too complicated for people to want to spend time with and deal with."
Still, banks should get ready for legal action.
"Everyone with mortgage exposure should be prepared for these kinds of lawsuits," Whitney told the network.
"How many of these claims have actually merit and legs will be determined. I don't think this is unique to Bank of America because it's so huge in the mortgage space, and obviously Countrywide has been accused of doing less than ethical things in the past."
Wall Street employees, meanwhile, need to prepare for more layoffs.
"The only way banks will increase return on assets and return on equity is if they streamline the business and get more profitable because shareholders are saying 'we're not interested because the returns are not good enough to invest in,'" Whitney said.
So aside from cutting expenses, will more layoffs be announced?
"There's no doubt about it," Whitney added.
Meanwhile, federal prosecutors say both Countrywide and Bank of America made bad business decisions at taxpayer expense, as when defaults began to stain the loan portfolios shipped to Fannie Mae and Freddie Mac, Countrywide and Bank of America refused to buy them back or make up for the losses.
"The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," Preet Bahara, a U.S. attorney in New York City, said in a statement, according to the AFP newswire.
"Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill."
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