Why Breaking Big Banks Like JPMorgan Chase & Co (JPM) And Bank of America Corp (BAC) Is Not A Good Idea?
JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) are facing the pressures of splitting their businesses. At a time when these banks were struggling for growth in the absence of interest rate hike for a long time, will it prove to be a worthwhile option for not only these two banks but the other two bigger banks too? The call comes in the wake of some of the leading tech firms splitting their businesses in the last few years. For instance, eBay Inc (NASDAQ:EBAY) separated Paypal Holdings Inc (NASDAQ:PYPL) and Hewlett Packard Company (NYSE:HPQ) split their businesses. There are also other companies that separated their businesses to unlock the value. Suddenly, the call for separation has got a big boost from the activist investors too.
Call For Split Grows
Until a few years back or before the financial crisis, it was the consolidation that was given importance. The objectives were to slash the expenditures and improve the bottom line results and also better placed in the marketplace with different brands to compete with the rivals. However, JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) have become a star attraction for investors to seek the breakup of the companies into two or more listed firms. The years 2014 and 2015 have seen a number of calls for splitting the business that were either pushed or backed by activists investors like Carl Icahn or Bill Ackman.
The financial institutions have got the attention now because of the SIFI regulations. Though JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) were aware of the regulations and ready to be in line with the regulators, activists investors are not ready to leave it. For instance, despite American International Group Inc (NYSE:AIG)’s rejection for splitting the business on Icahn’s call, the activist investor continued to put pressure on the company. Their argument got strengthened after Metlife Inc (NYSE:MET) announced its intention to split its business into two. General Electric Company (NYSE:GE) has come out of the financial regulations completely to avoid SIFI regulations, and now it can call itself as a pure industrial player. While insurance firms could escape partly by splitting their business, it would not be an easy one for other big banks. Let’s look at why these banks were against the split.
Shareholder Seeks Splitting
While JPMorgan Chase & Co. (NYSE:JPM) faces an immediate threat from the shareholders, Bank of America Corp (NYSE:BAC) is yet to see pressures officially to split their business. One of the reasons for the call getting a wider support was that these stocks have not performed to their potential in the stock markets. That means, their performance in the stock exchanges were either poor or underperformance compared to the major indices. It was because of the tightening of the regulations and the absence of interest rate hike for a long time. Also, the threat of the company recording any significant charges to provide for the possible resolution of any dispute always loomed large thus preventing the stocks to grow.
An investor of JPMorgan Chase & Co. (NYSE:JPM), Bartlett Nayor, planned to make a proposal at its AGM on May 17 that the company should consider splitting into more than one firms. This was filed with SEC. According to the proposal, one company should perform the regular business, as well as, consumer lending whereas the other divisions should concentrate on investment banking performances. Nayor worked for a non-profit organization known as Public Citizen and filed more or less similar resolutions at Bank of America Corp (NYSE:BAC), as well as, Citigroup Inc (NYSE:C) in the recent past. If he gets support from other shareholders or activists investors, the call will get a big boost.
Shareholders Value To Get Impacted
JPMorgan Chase & Co. (NYSE:JPM) reacted to the proposal filed with the SEC by urging the shareholders to vote against establishing a committee to explore the possibility of splitting the company. The bank reiterated its stance that the splitting of its business would not be in the best interests of investors. The same opinion was held by American International Group Inc (NYSE:AIG) too after Icahn urged the insurer to split into two or three firms. However, unlike the insurance firm, the bank was equipped with the extensive review made in the last year. That is coming in handy now to defend itself against the breaking of the company.
JPMorgan Chase & Co. (NYSE:JPM) was categorical that the establishment of a special committee would not yield any tangible results as an extensive review was already done in 2015. The review found that splitting of the bank’s divisions would have unfavorable impact on the shareholders value. Most of the investors and activists seek the splitting in the name of ensuring value to the shareholders. Therefore, if the company finds the splitting to have a negative impact, it would be tough to convince other shareholders. It was probably one of the reasons other big investors have not joined the call for a split of the company.
Splitting To Add Expenditures
This is a time where JPMorgan Chase & Co. (NYSE:JPM) or Bank of America Corp (NYSE:BAC) focus on reducing the expenditures to compensate the revenue loss from interest rate hike. Therefore, splitting the business would add to the costs. For instance, every service provided by one unit would become a chargeable for others though it was within the group. However, on a stand-alone basis, it would be a thorn. Also, size of the bank provides enough risk coverage for the deposits. For instance, a big bank could observe a few billions of bad loans whereas if it were reduced to only one division, then it would become a do or die situation.
For the success of any bank, consolidation and working as a single entity with multiple divisions ensure the safety of investors and depositors. It is applicable in respect of JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) also. If the banks are able to survive the lower interest rate, it was because of the other divisions’ performance. That would also make the stock as shining only when the interest rates are higher. Therefore, splitting the business of the big banks would not be an ideal choice.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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