KBW: The Market Is Telling Banks To Break Up

While the public discussion over whether or not to break up “Too Big To Fail” U.S. banks typically focuses on the size of the banks, Keefe, Bruyette & Woods argues that the market should decide which banks get broken up and which banks should stand on their own. According to analyst Frederick Cannon, size isn’t all that matters.
 

“Poor returns at large mega-banks over time limits credit creation, in our opinion, and that sends a signal that companies should radically restructure to achieve share prices above book value, or at least tangible book value,” Cannon explains.
 

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Despite their positions as the two largest U.S. banks by market cap, Cannon points out that both Wells Fargo & Co WFC and JPMorgan Chase & Co. JPM are trading at or above book value.

Seven years after the worst of the Financial Crisis, Bank of America Corp BAC and Citigroup Inc C are still trading at P/Bs of 0.57 and 0.59, respectively. Cannon sees this as a sign that these banks are better candidates for breakup than their larger peers because of the amount of value that could be unlocked in the process.
 

JPMorgan is expected to kick of Q1 earnings season on Wednesday.
 

Disclosure: the author is long BAC.