Bank of America's (BAC) brokerage and JPMorgan Chase's (JPM) asset-management division are among businesses ripe for divestiture if U.S. banks break up to improve stock prices, according to CLSA Ltd.'s Mike Mayo.
Citigroup's (C) Latin America unit is another example of operations that have "unrealized value," the analyst wrote in a note to clients today. Bank stock prices could double if risk and cost of capital at the firms were reduced, reversing past efforts to boost returns by taking on more risk, he said.
"The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price," Mayo wrote. "When we ask, a large majority of investors indicate that breakups — divestitures, downsizings and de-mergers — would be good for stock prices."
The goal should be "orderly" scaling back to achieve "safe banks" that have less leverage and lower risk, Mayo said. Zurich-based UBS AG's strategy of cutting costs by exiting most of its fixed-income business is a good example, he said.
Another approach would be de-mergers, Mayo wrote. After the introduction of the Glass-Steagall Act in 1933, which forced deposit-taking companies backed by government insurance to be separate from investment banks, price-to-book values surged, he said. The same thing could happen today, Mayo said, since many firms are trading below their book value. Book value represents the firm's theoretical liquidation price, which is calculated by subtracting liabilities from assets.
"Time seems to be running out for managements to show that the valuation discounts in their stocks are only short term," he said. "Investors are incentivized to act before the government, which can take action due to concerns that banks are too subsidized, too trouble prone, too big and too complex."
Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the note, as did Citigroup's Mark Costiglio and JPMorgan's Joseph Evangelisti.
Manuel Medina-Mora helps to oversee New York-based Citigroup's Latin America division, which includes trading, consumer banking and transaction services businesses. Net income from continuing operations increased 7 percent to $2.66 billion for the first nine months of 2012 from a year earlier, according to a financial supplement. The unit had average assets of $169 billion at the end of September, according to the supplement.
Mary Erdoes runs New York-based JPMorgan's asset-management unit, which oversaw about $1.4 trillion as of Sept. 30, according to a financial supplement. The division made a $1.22 billion profit for the first nine months of 2012, a 5.4 percent decline from the same period a year earlier.
Investment and brokerage services at Bank of America, which includes Merrill Lynch, generated $8.5 billion of noninterest income in the first nine months of 2012, a 6.9 percent drop from the same period in 2011, according to filings.
Bank of America Chief Executive Officer Brian T. Moynihan has overseen the sale of more than $60 billion in assets since he took over in 2010. He has called his company the "poster child" of a financial firm that's become smaller and less risky. The bank's total assets at the end of September were $2.17 trillion, 2.4 percent less than a year earlier.
Citigroup, the third-biggest U.S. bank, had total assets of $1.93 trillion at the end of September, about the same as a year earlier. Assets at the lender's "core" businesses increased 4 percent to $1.46 trillion.
The Citi Holdings division, which contains the firm's unwanted investments, reduced assets to $171 billion at Sept. 30, a 31 percent decline compared to a year earlier. The firm also agreed last year to sell its portion of the brokerage joint venture it has with Morgan Stanley to the New York-based investment bank.
Shares of Bank of America, Citigroup and Morgan Stanley are each trading at a fraction of their tangible book value, while JPMorgan and New York-based Goldman Sachs Group Inc. are trading above those values, according to data compiled by Bloomberg.