Bank Investors Press Breakups to Add Value, Burnell Says

Shareholders at the biggest U.S. banking conglomerates may demand breakups if valuations remain depressed, according to analysts at Wells Fargo & Co.

So-called universal banks such as Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are trading at a 25 percent to 30 percent discount to more-focused competitors, analysts led by Matthew H. Burnell wrote in a research report today. Goldman Sachs Group Inc. and Morgan Stanley, which concentrate on investment banking, trading and money management, are within 8 percent of the estimated value of their parts, the analysts wrote.

“Given the challenges posed by increasing regulation, higher capital requirements, and well-publicized trading/market challenges, it’s not surprising that investors remain reluctant to assign a ‘full’ valuation to the universal banks,” the analysts wrote. “If regulators and/or legislators don’t demand it, shareholders could also intensify demands to ‘break up the banks.’ ”

The analysts compared valuations of the biggest U.S. lenders to the estimated value of their separate pieces. On this basis, Burnell’s team calculated that pieces of Bank of America are worth 41 percent more than their tangible book value, a measure of how much shareholders would receive if the firms’ assets were sold and liabilities paid off.

Citigroup should get a 24 percent premium, JPMorgan should get 69 percent and Goldman Sachs should be valued at 19 percent more than tangible book, the analysts said.

Value Gaps

Citigroup, ranked third by assets and based in New York, and Bank of America, ranked second and based in Charlotte, North Carolina, trade at about 14 percent and 7 percent less than tangible book value, according to data compiled by Bloomberg.

JPMorgan, the biggest U.S. bank by assets, and Goldman Sachs, the fifth-biggest, trade for 28 percent and 9 percent more than tangible book value, respectively. The valuation for the two New York-based companies compares with the 281 percent premium fetched by Minneapolis-based U.S. Bancorp, the nation’s largest regional bank.

New York-based Morgan Stanley should be valued at a 13 percent discount to tangible book value, compared with the current discount of about 19 percent, the note said.

The note estimates that, based on the sum of their parts, Bank of America is worth $16.07 a share, Citigroup should trade at $63.33, JPMorgan is worth $64.83, and Goldman Sachs and Morgan Stanley should fetch $159.59 and $23.32 respectively.

Capital Rules

New legislation to impose higher capital rules on the largest banks, such as the proposal from Senators Sherrod Brown and David Vitter, probably would trigger a break-up of the largest lenders, the analysts wrote. While new legislation is “unlikely” to go forward at this time, it’s a “non-trivial risk given the environment,” the analysts wrote.

Michael Mayo, CLSA Ltd.’s bank analyst, wrote in a separate note yesterday that shareholders in the biggest firms are more likely to agitate for changes than in prior years.

“Almost every large investor from our meetings and conversations over the past four months agrees that bank managements should be held more accountable and more often intend to vote against directors, compensation plans, and other actions,” Mayo wrote in an April 9 research note.

Citigroup, KeyCorp, Morgan Stanley and State Street Corp., which hold annual shareholder meetings in the next six weeks, have come under pressure from investors who have sought cost cuts and new ways of doing business, Mayo wrote. He recommends stocks of all four companies, saying the activism has raised awareness among investors and management of the need for change.

Mayo’s Agitation

Mayo told Erik Schatzker and Stephanie Ruhle on Bloomberg Television today that “I’ll be going to the annual meetings for the first time ever” to press for changes.

Mayo criticized the Securities and Exchange Commission’s ruling last month that allowed New York-based Citigroup, the third-largest U.S. bank by assets, to omit from its annual meeting a proposal by shareholder Trillium Asset Management LLC that would require the lender to explore a breakup.

“The benefit of proposals such as the one from Trillium is that it would place more control in the hands of shareholders in driving more of these decisions,” Mayo wrote. “Let the owners have a say. Yet, the effect of the SEC is limiting shareholders’ ability to have more influence, a terrible result.”

(Analyst corrects sum-of-the-parts valuations for Goldman Sachs, Morgan Stanley starting in second paragraph of story published April 10.)
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