Advocates of breaking up the nation's megabanks just added a prominent ally.
Keefe, Bruyette & Woods, a New York investment banking firm known for its expertise in commercial banking, on Monday
Granted, even the report and one of its authors acknowledged that a breakup is unlikely to happen anytime soon, but it adds fuel to the debate over whether to force the biggest banks to get smaller and less complex.
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Judging from the questions executives fielded about everything from the slowdown in China to the bank's energy exposure to the potential for another 2008-style crisis, worries are running high.
January 15 -
JPMorgan Chase chief Jamie Dimon added to his defenses of megabanks, arguing that regional and community banks rely on them. The comments could inflame tensions among banks instead of easing them.
February 23 -
In what could be seen as a Nixon-to-China moment, Minneapolis Fed President Neel Kashkari, a former Goldman Sachs executive and one of the architects of Treasury's bailout of the largest banks, said that breaking up the big banks and turning them into public utilities may be the only way to solve "too big to fail."
February 16 -
Busting up JPMorgan Chase would result in a collection of financial services companies with higher back-office costs, more divided capital and less power to be a world leader, the company's CFO said Tuesday.
February 24
The conversation has gained traction over the past few months.
Meanwhile, shareholders at both Citigroup and JPMorgan Chase are slated to
A Citigroup spokesman declined to comment on the new KBW report, except to point to a defense of Citi's current strategy in its 2016 proxy statement.
"Over the past several years, the [Citi] board has hired several subject-matter experts to assist it in determining if the firm's chosen strategy was the most likely one to create the best long-term outcomes for our stockholders," said the proxy, which was filed last week. "Pursuant to its most
recent review, and having taken into account changes in the operating environment, the board remains confident that the current strategy being executed by the existing management team will yield the best long-term results."
Investors have started asking more questions "about how Citi is going to improve returns," Brian Kleinhanzl, an analyst with KBW and an author of the report, said in an interview when asked what prompted the report. Generating returns for investors will continue to be a challenge for Citi, as regulators push for
The issue became even more timely last week when Citigroup, unlike several of its competitors, said it has no plans
Citi would be about 50% more valuable if it were split into two smaller units, according to KBW. Under the breakup scenario, the company could boost its estimated market value to $198 billion.
Under the breakup scenario outlined by KBW, Citigroup would split into two separate companies: Citi Consumer, which would include its retail and card units; and Citi Corporate, which would include investment banking, treasury management and other trading units.
A key justification for the separation is that, unlike its primary rivals, Citi does not provide the same
"We don't see as many synergies between the businesses," he said.
Additionally, under the KBW plan, Citi would sell off its international consumer businesses, including its troubled
Selling off the units would further limit Citi's exposure to emerging markets, according to the report. It would also streamline the company's structure.
"We believe that a sale of international consumer would be viewed positively by investors since emerging markets have added to the boom-and-bust mentality regarding [Citi's] results," the KBW report said.
To be sure, Citigroup has slimmed down in recent years,
But it has largely struggled to get back on its feet after the financial crisis. It
Additionally, Citi shares have traded consistently below tangible book value since 2009, KBW said.
"We believe Citi's sub-tangible book valuation is reflective of the earnings power of the company," KBW said in the report.
KBW did not weigh in on Citi's upcoming shareholder vote, which involves a less specific proposal. Citi’s proxy statement,
Still, breaking up one of the nation's largest banks remains somewhat of a long shot. A similar proposal, voted on by Bank of America shareholders last year, attracted about 4% of votes. Also last year, a similar call to break up
At various points in the report, KBW noted that it does not expect federal regulators or Citi's board to embrace a breakup plan anytime soon.
If the company continues to post lackluster results and boost shareholder returns, however, the issue will likely be pushed to the forefront, KBW said.
"What you're going to see is conversations increase over time," Kleinhanzl said. But it may take "more uprising from investors" to gain momentum, he said.