In one of the surprising reports about JPMorgan Chase & Co. (NYSE:JPM), an analyst at Goldman Sachs Group Inc (NYSE:GS) said that the bank could boost its share prices by breaking up into multiple financial institutions. The analyst proposed a breakup into two or four financial institutions to bring down the capital requirements as per the new federal regulations.
According to Richard Ramsden of Goldman Sachs Group Inc (NYSE:GS), the shares of JPMorgan trade at 20% discounted rates as compared to its smaller peers specializing in different financial segments. He further said that investors often overvalue these smaller specialized companies because of their lower regulatory burden.
Mr. Ramsden said that a separation could help the bank melt down the valuation discount and while talking about the size of the bank, he added that the bank is a “victim of its own success.” The statement came out after the regulators warned JPMorgan Chase & Co. (NYSE:JPM) last year about its capital requirement deficit standing at $21 billion and the bank would have to cover it before tougher capital regulations take effect in 2016.
While discussing the separation, Mr. Ramsden said that the business lines of JPMorgan Chase & Co. (NYSE:JPM) are best at what they do and each of these segments have the strength to survive as an individual entity. He said that the shareholders would value the individual units higher after comparing them to their respective peers, although the bank is likely to lose synergies of up to $4 billion after separation but its share price growth would balance the losses.
There was no official comment from JPMorgan Chase & Co. (NYSE:JPM), although the CEO of the bank, Jamie Dimon, has emphasized the benefits of its large size time and again. However, the latest ruling from the U.S. Federal Reserve requires eight of the major banks to increase their capital reserves, which could bring in additional financial burden for JPMorgan.
This article has been written by Prakash Pandey.