JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, would be worth 30 percent more if broken into its four business segments, an unlikely scenario, an analyst at Stifel Financial Corp. (SF)'s KBW unit said.
JPMorgan's businesses traditional banking, investment banking, asset management and private equity are separately worth $255.7 billion, KBW's Christopher Mutascio said today in a note. That compares with the New York-based lender's $197 billion market capitalization as of yesterday's closing price.
While the possibility of breaking up JPMorgan is "quite low," it "could potentially result in substantial upside for current shareholders if the segments were valued like similar companies," Mutascio wrote in the note.
JPMorgan said it estimates that losses from lawsuits and investigations could exceed its legal reserves by as much as $6.8 billion, according to an Aug. 7 regulatory filing. While litigation costs are "high and uncertain," JPMorgan can "easily earn through them," Mutascio wrote.
New regulatory probes and potential litigation costs have damped JPMorgan's stock price compared to other large banks, Mutascio said. JPMorgan has slid 7.8 percent since Aug. 1 to $52.11 at 11:35 a.m. in New York, compared with the 3.4 percent drop in the 24-company KBW Bank Index.
Share prices of the biggest banks reflect the possibility that net interest margins will expand when short-term rates increase, an event that might not occur for two years, Mutascio wrote in the note. Rather than investing in other banks, investors can buy JPMorgan shares at a discount and wait for litigation costs to decline, he wrote.
"We believe the resulting discounted valuation represents an attractive valuation alternative to other banks that are poised to disappoint investors when their net interest margins do not expand" immediately, he said.
Brian Marchiony, a spokesman for JPMorgan, declined to comment on the note.
To reach a valuation, Mutascio used the trailing 12-month net income for each of JPMorgan's four units, subtracted preferred dividends and applied a price-to-earnings multiple of a similar company to find the value of each segment.
JPMorgan could also "free up" about $20 billion in common capital if it were broken into four parts, Mutascio wrote. That's because the individual units would need to hold less capital to reduce risk than the company as a whole, he said.