A team of Goldman analysts led by Richard Ramsden raised quite the storm earlier this week by releasing a 20 page research note suggesting that JP Morgan (JPM), one of the world’s largest banks, should break itself up. Apparently the bank is a victim of its own success (isn’t that just the best kind of victomhood?) and has been targeted by the Fed to hold a rather high level of capital thereby shrinking its profits. The fix? A breakup into either four (by business line) or two (effectively JP Morgan and Chase) different units will suffice.
A cynic might note that the suggestion is rather rich coming from JP Morgan’s biggest competitor who just might benefit from some weakened competition. Even taking the suggestion at face value, it’s not clear how great a move this would be for the bank. The idea itself isn’t new and many believe that CEO Jamie Dimon specifically touted the $6b in cross-selling synergy profits in his last letter to squash the concept. Keeping that $6b in mind, any breakup would have to compensate for a potential sizable profit loss. Matt Levine at BloombergView notes that much of that extra value comes from an expected ‘multiple rerating’ for the company becoming more of a pure play. Essentially, JPM currently trades at a sizable (~20%) discount to its peers as ‘punishment’ for being a conglomerate and a breakup would remove that valuation gap. Perhaps, but in addition to the cross-selling synergy, Levine notes there might be other benefits, such as funding costs, which are being ignored.
Even the note itself acknowledges the upside is somewhat limited, with a range of scenarios unlocking only ‘5 percent to 25 percent potential upside’ and that is with significant ‘execution risks’. Not many are going to get excited and pursue a lengthy, costly process for a mere 5% upside. The note suggests that at the very least, the breakup option could serve as a ‘Regulatory Put’ for the bank should further tougher regulatory rules come into place. I think that is a good point and in the meantime, perhaps JPM may decide to unload some assets, although that might not be enough to reduce its stricter capital needs. For now, and due in no small part to the exceptional synergy and best in class operations, it seems that maybe bigger is still better for JP Morgan.
Disclosure: Author holds no position in any stock mentioned.