It’s hard to say whether future Enron settlements will affect the ratings of banks that are still facing legal action, according to a new report from Standard & Poor’s Ratings Services.

S&P says that there should be no ratings consequences for financial institutions involved in the Enron suits as long as any settlement, penalty, or reserve addition remains at about one-fourth of annual earnings. That has so far proven to be the case for all but CIBC, S&P says, noting that it changed its outlook on CIBC to negative as a result.

“However, we cannot project that the same will hold true at institutions where there has been no resolution, for two principal reasons: It is impossible to know the size of any future settlement or penalty and, without knowing that, it is impossible to know how any given resolution — a one-time charge — will affect the balance sheet,” it concludes.

TD Bank’s mid-August announcement that it had added $300 million to its reserves to cover potential liability from a series of suits arising from the collapse of Enron Corp. brings to seven the number of financial institutions that have announced that they are boosting legal reserves related to those suits, S&P adds.

The largest of the suits, the Newby suit, seeks relief, on behalf of securities holders, from several major banks and brokerages alleged to be complicit in the demise of the energy trading giant, which filed for bankruptcy in December 2001. Only five banks have actually settled that suit: CIBC, Lehman Brothers Holdings Inc., Bank of America Corp., Citigroup Inc., and J.P. Morgan Chase & Co. Others have settled smaller related suits.

There are still a handful of banks and brokers named in the Newby suit who have yet to either settle or proceed to trial: TD Bank, Credit Suisse, Merrill Lynch & Co. Inc., Deutsche Bank AG, Barclays Bank plc, Royal Bank of Canada, and Royal Bank of Scotland plc. “How these remaining institutions put the matter behind them is a concern for investors because the possible liability for any one of them could be considerable,” it says.

“While each of the remaining banks in unresolved situations continues to contest the case, the fact is that each of the banks that has settled in the Newby suit has done so for a progressively larger amount. Indeed, plaintiffs’ attorneys have stated that it is their intent to seek increasingly larger settlements. If this pattern holds, that would mean that the next banks to settle could settle in excess of the $2.4 billion that CIBC agreed in early August to pay,” S&P warns. “That would appear to give those institutions whose cases are unresolved an incentive to settle.”

Standard & Poor’s says it is not predicting that this pattern will persist, although plaintiffs’ attorneys would clearly like to win the most money for their clients.

“Also complicating the matter is the nature of the suit. Any judgment, were the case to go to trial and be decided against the banks, would be joint-and-several, meaning that all the remaining banks and brokers would be equally responsible for the total amount. Will any of them want to take that chance, no matter how innocent they believe themselves to be?” the rating agency asks. “The Newby suit, after all, is seeking in excess of $30 billion in damages.”

Standard & Poor’s has not altered the ratings on any of the banks that have settled the Newby suit. With the exception of CIBC, the charges represented less than a quarter of earnings, and were deemed to be a one-time event that did not alter the future prospects of the firm. “The sum was a year’s worth of earnings for CIBC, but the bank had substantial excess capital stockpiled for the event,” it notes. “Thus, while we changed the outlook to negative to reflect the potential constraints on strategic initiatives and financial flexibility, we maintained the bank’s ratings. Future rating actions would take into consideration the total financial impact as well as any ways in which the longer-term prospects of the firm would be affected.”