Analysts discuss paradigm shift: breaking up banks

Thu Apr 11, 2013 9:44pm EDT

A Wall Street sign is seen in front of the New York Stock Exchange in New York's financial district, March 4, 2013. REUTERS/Brendan McDermid

A Wall Street sign is seen in front of the New York Stock Exchange in New York's financial district, March 4, 2013.

Credit: Reuters/Brendan McDermid

(Reuters) - At least three Wall Street analysts this week have written reports about the possibility of the biggest banks breaking themselves up to boost profitability, signaling that investors may be more willing to embrace an idea that is still toxic to some lawmakers in Washington.

New regulations in areas like capital requirements are imposing higher costs on the biggest investment banks, raising doubts about their future profitability. These questions make the biggest global investment banks "un-investable," wrote analyst Kian Abouhossein, who himself works at JPMorgan, one of the biggest global investment banks.

Breaking up large "universal banks," could unlock value for shareholders, Wells Fargo analyst Matthew Burnell wrote in a report on Wednesday. These "financial supermarkets" typically house investment banking, consumer banking and wealth management operations under one roof.

If these banks broke up into smaller companies, the value of the parts would likely be greater than the current whole, Burnell wrote. He estimated that universal banks currently trade at 25 to 30 percent below publicly traded financial firms that focus on just one business.

CLSA analyst Mike Mayo, a long-time critic of big banks, wrote on Tuesday: "Almost every investor that we speak with indicates that a breakup would be bullish for the stocks."

"While there is skepticism as to whether a full breakup will occur, there is an undercurrent of shareholders who would support such a move," he added.

The 2010 Dodd-Frank financial reform law was designed to end government bailouts of too-big-to-fail banks by creating mechanisms for winding down large financial institutions.

But some U.S. legislators are looking to add rules that would impose extra costs on the biggest banks, to reflect the fact that these companies could still end up being bailed out in the next crisis.

Under a proposal from senators David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, banks with more than $400 billion in total assets would face an additional capital surcharge. The bill would also prevent banks' riskier affiliates from accessing government support such as deposit insurance.

JPMorgan's Abouhossein said the risk of these types of rules being imposed by lawmakers and regulators around the world makes it difficult to buy shares of the biggest investment banks.

(Reporting by Rick Rothacker in Charlotte, North Carolina)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
andreapsoras wrote:
it’s logical for analysts to discuss this when the banks have to meet capital adequacy standards for BAsel III, even if in the US the Fed and the bank regulators backed off on requiring THAT. the US banks have had to meet capital adequacy standards anyway. CAMELs rates for that. Divesting of businesses to shrink the balance sheet is another way to ‘break up’ the bank. Although that’s not the securitization about which Lowell Bryan years ago had written, banks have always moved in and out of businesses. The vandals which want SIFIs to dis assemble, havent gone after the Europeans and in Europe there is barely a breath spoken nor focusing on cutting up their TooBig to Fails. and DB now is the world’s largest bank and probably wanting to get away with rolling up the side walks on most of the rest of europe if it thought it could get away with that.

Apr 15, 2013 8:30am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.