Looking To Break Up A Bank? WSJ Says Forget JP Morgan and Look At Citi Instead

Analysts at Goldman Sachs (GS) made waves last week suggesting that megabank JP Morgan (JPM) break itself up in response to the heavy capital restrictions imposed on the bank by the Fed.The WSJ’s Heard On The Street column thinks it’s a good idea, just tossed at the wrong bank. Instead of the House of Dimon, the WSJ thinks Citigroup (C) would be a better candidate for a breakup. The piece hits Citi’s performance pretty hard, noting that by ‘many standards used by regulators to assess systemic importance, Citi sits just behind J.P. Morgan, even though it has displayed nowhere near its rival’s profit-generating ability’. It also points out that Citi has continued to flunk Fed stress tests and its ‘shares haven’t traded above book value since September 2008.’ In fact, ‘over the past three years, the stock has also consistently traded near or below tangible book value.’ Burn.

The WSJ suggests a breakup along its four business lines and believes the move would offer regulatory relief and possibly even gains from simplified businesses. Additionally, it might allow ‘funds to be returned to investors and frees faster-growing businesses to achieve valuations closer to those of smaller, less complex peers.’ Of course, breaking up might eliminate any inter-business line synergies and reduce the overall value. Additionally, Citi has a sizable tax asset which might be wasted if the bank spins off assets and the large, ‘bad asset’ holding company might not be attractive on its own or as part of a smaller unit. That said, the article believes the possible benefits outweigh the potential negatives.

While this may seem like a trivial idea, apparently it might carry a lot of significance during the upcoming 2016 presidential election. Seriously? Although it’s just like politicians to recycle old ideas. Back in 2012, shareholders led by Trillium Asset Management submitted a formal proposal asking the board to consider a breakup and even one of its own Chairmen explored the idea.

Although no valuation estimates were included, the case for breaking up Citi seems a bit more solid than the one at JPM. The WSJ piece closes off nicely, pointing out that onus is really on management to start delivering:

For six years, the market has said Citi is worth more dead, or broken up, than alive. If management can’t forcefully rebut that notion—something it has so far been unable to do—it should start listening to its owners.

Disclosure: Author holds no position in any stock mentioned.