Jamie Dimon, Chairman, President and Chief Executive Officer, JP Morgan, speaks at the Institute Of International Finance Annual Membership Meeting in Washington, D.C., U.S., on Saturday, Oct. 12, 2013. Photographer: Pete Marovich/Bloomberg

New York - Combined profit at the six largest US banks jumped last year to the highest level since 2006, analysts have forecast, even as the firms allocated more than $18 billion (R192bn) to deal with claims they broke laws or cheated investors.

A stock market rally, cost cuts and a decline in bad loans raised the group’s net income 21 percent year on year to $74.1bn, according to analyst estimates. That would be second only to 2006, when the firms reaped $84.6bn at the peak of the US housing bubble. The record would be topped were it not for litigation and other legal expenses.

Wall Street’s largest banks, due to report fourth-quarter earnings starting on Tuesday, are contending with fresh accusations they misled buyers of mortgage-backed securities, rigged markets or ignored suspicious activity by customers. JPMorgan Chase chief executive Jamie Dimon, whose firm announced more than $23bn in settlements of government and private suits in the past year, has said legal expenses at the bank would remain high.

Jason Goldberg, a Barclays analyst in New York, said: “Legal-related costs significantly impacted results in 2013, and we think they’ll stay elevated in the near term. Banks will try to get a lot done in year-end results to have less of a burden in 2014.”

JPMorgan and Wells Fargo, the first to post results, will show the impact US regulatory scrutiny is having on banks.

Analysts expect Wells Fargo to announce its biggest annual profit, surpassing JPMorgan’s for the first time since 2009. Net income at the fourth-largest US bank, which relies most on retail banking and mortgage lending, is forecast to rise 4.1 percent in the fourth quarter to $5.3bn. For the year, analysts estimate about $21bn, a fifth consecutive annual record.

JPMorgan will probably say profit slid 14 percent to $4.9bn, according to analysts. The firm’s annual profit may drop 21 percent to $16.9bn, snapping three consecutive years of records.

The bank agreed this week to pay $2.6bn to resolve criminal and civil allegations that it failed to stop Bernard Madoff’s Ponzi scheme, a deal JPMorgan said would cut fourth-quarter earnings by $850 million. In November, it reached a record $13bn settlement of probes into mortgage-bond sales. The firm also resolved inquiries last year into botched derivatives bets, energy market manipulation and credit monitoring products.

JPMorgan allocated $11.1bn to litigation and legal costs during the first nine months of last year, the most among the six lenders, according to quarterly reports banks filed with the Federal Reserve. Bank of America set aside $4.8bn and Citigroup $1.4bn.

The six banks’ combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7bn, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413m, and Morgan Stanley, which reported a 14 percent decline to $211m.

“Even into 2014, legal could be a drag for the whole industry,” Pri de Silva at CreditSights said. “But it can’t be any worse than it was last year.”

Spokesmen for the six banks, which also include Goldman Sachs, declined to comment.

Settlements do not always hit a bank’s earnings in the same quarter. That is because firms set aside reserves as costs become probable, sometimes years before cases are resolved.

JPMorgan was not alone in settling government claims last year. Citigroup and Wells Fargo were among six firms that paid almost $3.9bn to resolve Federal Housing Finance Agency claims that they sold faulty mortgage bonds to Fannie Mae and Freddie Mac. Bank of America also agreed to an $11.7bn package designed to resolve most mortgage disputes with Fannie Mae.

Last year was the best for US financial stocks since 1997. The 24-company KBW banks index climbed 35 percent amid a broader rise in equities and an accelerating US economy. Revenue from equity trading probably jumped 33 percent from a year earlier, Matt O’Connor, a New York-based analyst at Deutsche Bank, wrote last month.

Annual earnings at Bank of America and Citigroup surged last year.

Bank of America, scheduled to announce results on Wednesday, boosted fourth-quarter profit more than fourfold to $3.3bn, according to the estimates. Net income for the year may amount to $11.2bn, the most since 2007. Bank of America’s earnings will have rebounded from a year ago, when profit in the fourth quarter fell to $732m because of mortgage-related settlements.

Citigroup, set to report a day later, is estimated to say profit more than doubled to $3.14bn in the quarter or $14.2bn for the year, the most since 2006. The firm booked costs tied to a mortgage settlement a year earlier.

Legal troubles were not the only drag on earnings for banks last year. A slump in fixed income trading probably cut revenue from that business by 10 percent, according to O’Connor at Deutsche Bank.

Goldman Sachs suffered the steepest decline at 23 percent, he estimated. The firm will say quarterly income fell 28 percent to $2.09bn in its results on Thursday, analysts estimate.

Morgan Stanley is set to report results a day later and analysts expect it to say that profit for the period rose 70 percent to $859m.

The reduction of monthly bond purchases by the Fed may continue to damp fixed-income trading. Rising interest rates linked to Fed actions also cut mortgage revenue last year as fewer homeowners refinanced bonds.

Banks were focusing on expenses they could control, Erika Najarian at Bank of America wrote last month.

The six big lenders reduced their workforce by 29 000, or 2.6 percent, in the first nine months of 2013. Many cuts targeted mortgage personnel.

Investors would focus more on executives’ forecasts for this year than last year’s numbers, said Richard Staite at Atlantic Equities in London. “We expect management comments during conference calls to generally remain upbeat with stronger economic growth, a steeper yield curve and stronger equity revenues all being supportive.” – Hugh Son from Bloomberg