Goldman Sachs to JPMorgan Chase: Time to break up.
Goldman says that JPMorgan (JPM) would be worth as much as 25% more if it were split into different pieces. Goldman advocates a “complete breakup” of the nation’s largest bank, and says the boost in returns from a split would far out weigh the synergies that JPMorgan claims it gets from its current size.
In a report released on Monday, Goldman’s lead banking analyst said that JPMorgan could be broken up into four parts. The biggest of the pieces would include the bank’s branch network, which Goldman says could be worth over $100 billion on its own. JPMorgan’s investment bank would be nearly as large, followed by its commercial bank and an asset management company.
Goldman says that even splitting JPMorgan in two—dividing the investment bank from the traditional bank, returning the company roughly to what was allowed before the Glass Steagall Act was repealed in the early 2000s—would boost the overall value of the current bank by 16%. “Our analysis indicates that even accounting for lost synergies, a JPM breakup would be accretive to shareholders in most scenarios,” wrote Goldman analyst Richard Ramsden in the report.
Banking reform advocates have long called for the nation’s biggest banks to be broken up. The so-called too big to fail problem has received plenty of attention since the financial crisis. Many believe the government in late 2008 was essentially forced to bail out the nation’s banks in order to avoid a deeper recession. Some think new regulations have addressed the too big to fail problem. Others, including some prominent bankers, think big bank break ups would make sense. Sandy Weill, who was the CEO of Citigroup when it became the first of the nation’s modern mega-banks, now says he believes breaking up the large banks makes sense.
But this is the first time Goldman has called for a bank bust up. Ramsden says the new capital requirements for big banks proposed by the Federal Reserve in early December make now a good time to consider such a split. Under the proposed Fed rule, JPMorgan, because of its size, would be required have enough capital to cover 11.5% of its riskiest assets. That could be as much as 2 percentage points more than even its closest rivals, like Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), or even Goldman (GS). What’s more, Ramsden says a break up makes more sense for JPMorgan because, unlike some of its rivals, its individual businesses are strong enough to stand on their own. The bank is partly a victim of its own success, he says.
JPMorgan declined to comment on the report. The bank’s shares rose just 7% in 2014, half as much as BofA’s shares and significantly trailing the performance of Well Fargo’s stock, which was up more than 20%.
In the past, JPMorgan has said that it brings in as much as $15 billion in revenue because it is able to cross-sell its services among its divisions. But Ramsden contends that most of those synergies aren’t real. As much as half of JPMorgan’s “disclosed revenue synergies” are within the investment bank or the commercial bank, and not really across divisions, he says.
Ramsden admits that breaking up JPMorgan comes with its own set of operational risks. Estimates of what companies would be hypothetically worth if they were broken up often yield higher figures than what a company currently trades for in the real market.
Goldman, for instance, ranks as the fifth largest bank in the nation by assets, with $868 billion. (JPMorgan had just over $2.5 trillion in assets at the end of the third quarter of 2014, making it No. 1.) So, here’s my proposal: Break up Goldman into three divisions: investment banking, private equity, and asset management. Do that, and, based on my back-of-the-envelope math, and using Ramsden’s model, Goldman would be worth at least $100 billion, or nearly 18% more than what its shares are trading at today. And that’s before any benefit Goldman gets from the fact that its divisions would be smaller and therefore required to hold less capital by the Fed. It’s time to break up Goldman Sachs!