Want to Shrink Banks? Try Greed

The potential for big gains could motivate shareholders more than their concern for the greater good.
At Closing, June 20st
67.38 USD

Could we interest you in a safer global financial system?

No? How about a 57 percent increase in your investment?

This is how the push to break up big banks could gain some serious steam, and quickly. While politicians and policy makers like Bernie Sanders and Minneapolis Federal Reserve Bank President Neel Kashkari are discussing taking a chain saw to the too-big-to-fail banks to avoid a repeat of the financial crisis, it's debatable whether that's a wise route to take.    

However, shareholders may find a much more simple reason to embrace the chain saw: good old-fashioned greed.     

Splitting up Citigroup into one company focused on consumers and another focused on corporations could improve the valuation of the bank by more than half, according to KBW analysts Brian Kleinhanzl and Michael Brown, who on Monday published a long report pitching that idea.


Citigroup's share price has been largely stagnant.

Source: Bloomberg

The analysts propose that Citigroup first sell its international consumer business and its Banamex consumer and small/medium enterprises businesses, then further split the company into Citi Consumer and Citi Corporate. While Citigroup has been actively shrinking the bank by shedding businesses around the world, this suggestion would be a much more drastic reshaping. 

The sale of the international consumer business would remove the "boom-and-bust mentality" of emerging markets from the company's results, according to the analysts, while the subsequent split in two would free up cash for shareholders that otherwise would be trapped because of capital requirements placed on too-big-to-fail banks.

Are they right? It's hard to say for certain, but it's obvious that Citigroup's chronically depressed valuation could make a solution like this very attractive to investors. Citigroup has traded at a discount to its tangible book value for most of the aftermath of the financial crisis:  

Citigroup Skepticism

Investors haven't shown much willingness to consistently pay more than Citigroup's tangible book value since the financial crisis.

Source: Bloomberg

And the timing is certainly interesting, as the chorus to break up big banks has gained so many harmonious voices. In addition to Kashkari's plan to hold symposiums to discuss too-big-to-fail banks, the activist organization Public Citizen is reportedly preparing proposals to ask shareholders of Citigroup and JPMorgan Chase to vote on creating committees to study whether breaking up the companies would benefit investors.   

Ultimately, a plan like the one from KBW's analysts would need some muscle behind it in the form of big-name investors. In fact, it's surprising that activists haven't already started making noise about breaking up Citigroup, the way that Carl Icahn and John Paulson have with American International Group.

Maybe the hassle and uncertainty of dealing with the inevitable time-consuming regulatory scrutiny of a breakup is too much of a turn-off. As the KBW analysts acknowledge in their report in the "cons" column of the pros and cons of a breakup, it's unclear whether regulators would even allow this type of split because of increased risk in the investment bank. Also, the Fed would still have to approve any return of excess capital after a breakup, and there's no guarantee of that.

Still, it wouldn't be surprising if calls to break up Citigroup based on greed start becoming even louder than calls based on safety.     

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Michael P. Regan in New York at mregan12@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.