Less is more.
Bloomberg reports that Bank of America’s brokerage and JPMorgan Chase’s 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 Inc. (C)’s Latin America unit is another example of operations that have 'unrealized value', the analyst wrote in a note to clients Wednesday. 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 (UBSN)’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.
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