Citigroup Inc., the fourth-largest US bank, should consider breaking itself into smaller pieces because higher capital rules make it difficult to earn acceptable returns, analysts at Keefe, Bruyette & Woods said.
A breakup could come in three steps: selling the international consumer businesses excluding Mexico; selling the Mexico franchise; splitting the remaining firm into a US consumer business and a global corporate bank, KBW analysts led by Brian Kleinhanzl wrote in a note. The dismantling would deliver an estimated market value of $198 billion, or 57 percent more than the current level, they wrote.
“One of the primary benefits of becoming smaller is escaping the vise that is the current regulatory environment,” the analysts said.
Citigroup’s shares have traded below the tangible book value, a measure of the price the underlying assets would fetch in a sale, as they have “fairly consistently” since 2009, they said.
Citigroup is the latest lender to land in the crosshairs of analysts and investors grown tired of stricter capital rules that weaken revenue prospects and pressure share prices. In January 2015, Goldman Sachs Group Inc. analysts said JPMorgan Chase & Co.’s parts were probably worth more than the whole after regulators proposed tougher rules penalizing firms for size and complexity.
“Citi’s board of directors, as part of its fiduciary obligation to shareholders, annually conducts a formal review of Citi’s strategy and progress,” Jennifer Lowney, a bank spokeswoman, said in an e-mailed statement late Monday. “The board remains confident that the current strategy being executed by the existing management team will yield the best long-term results for shareholders.”
Citigroup shares have dropped 16 percent this year, the third-worst performance in the 24-company KBW Bank Index.
Citigroup announced the sale last month of retail-banking and credit-card operations in Brazil, Argentina and Colombia, continuing a shrinkage of its international footprint. The bank operated branch networks in 24 countries at the end of last year, down from 40 as recently as March 2012.
“The rules and capital requirements are so high that these banks cannot earn an acceptable return for shareholders, nor can they in some cases earn their cost of capital,” KBW Chief Executive Officer Tom Michaud said Monday in an interview on Bloomberg Television.
“The bar has been set too high for these banks to keep their current business models.”
A breakup may not be the only possible best course for Citigroup, Michaud said.
Sanford “Sandy” Weill, whose creation of Citigroup ushered in the era of US banking conglomerates a decade before the financial crisis, said in July 2012 that it was time to split up the largest banks to avoid more bailouts. John Reed, who merged his firm with Weill’s, has offered a similar opinion. Other banks that generate what Michaud described as “sub-par” return on equity, such as Bank of America Corp. and Morgan Stanley, will also have to answer to whether their strategies are giving shareholders an acceptable return, he said.
Bank of America was raised to buy from sell in January by Mike Mayo, an analyst at CLSA Ltd.s low valuation and “lousy” efficiency increase the chances shareholders will demand a spinoff or other type of restructuring.