JP Morgan Chase (JPM, Financial) is the largest bank in the U.S. in terms of assets. Currently the banking sector is facing a lot of turmoil and JP Morgan is no exception to this rule. The leading investment bank had to face pressure from all quarters. Analysts from Goldman Sachs (GS, Financial) were of the opinion that JP Morgan’s assets could be used properly if it was broken down into 2 or 4 units. Other Wall Street experts also started suggesting the same at a time when the fourth-quarter results were to be announced by the bank’s CEO and chairman, Jamie Dimon. Here are some of the reasons why it would not be wise for JP Morgan to be broken down and why it should remain as a single coherent unit.
Return on equity
The yardstick for measuring a bank’s performance is its return on equity. This is nothing but the amount that a bank earns as compared to its shareholders ownership value. This is an important value for any bank because this indicates if a particular bank has been creating value for its shareholders or not. JP Morgan has been having a consistent return on equity of 10% over the last few years in spite of the banking sector not doing well and amid pressure from all sides. This, in itself, is a valid proof that the bank has been doing very well as a single unit. It was only during Q3 2013 that the bank didn’t report positive returns on equity, because it was bogged down by huge legal expenses during that time. This is the chart that shows the consistent returns on equity by JP Morgan.
JP Morgan Chase has been consistently producing 10% returns on equity as it is the only known name other than Wells Fargo to report this. Shareholders’ value has always been increasing at this bank, and there is no need to panic now and disturb the existing structure, thus sending the entire operations for a toss. It is a great achievement that JP Morgan Chase has been able to report consistent returns on equity at a time when the banking industry has been undergoing lots of problems and challenges. Some of the big names like Citigroup (C, Financial) and Bank of America (BAC, Financial) have not been able to sustain in this volatile scenario and do not figure in the list of banks that provide consistent returns on equity.
What does the CEO have to say about breaking down his company?
Since the suggestions to break down JP Morgan Chase came just before the fourth quarter earnings results, Dimon was naturally asked his views about Goldman Sachs’ suggestion of breaking down the bank. The CEO put certain points clearly and explained, in no uncertain terms, that JP Morgan Chase would not and could not be broken down for certain practical reasons.
According to Dimon, JP Morgan Chase Bank was a huge unit that has been functioning like this for many decades together and hence would be almost impractical to broken down into 2 or 4 units as per industry suggestions. He also said that the market share and the customer satisfaction that the bank enjoyed currently was a result of synergy of various units working together. Breaking down these at this stage, would affect the bank to a great extent and would not give the benefit of cost savings that it currently enjoys.
Working as a single cohesive unit helped JP Morgan handle the recession of 2008 in a better way than most of its other investment banking counterparts, according to Dimon. It was due to the fact that JP Morgan was a huge unit, that the acquisitions of Bear Stearns and Washington Mutual became possible. Last but not the least; Dimon was of the view that at the present stage, the U.S. needed banks that were massive and that had the experience of many years of research and talent. With all these factors in place, he categorically stated that breaking down JP Morgan Chase at present was not the right move.
Conclusion
JP Morgan Chase is currently one of the strongest investment banks in the U.S. and it is working on the massive strength of its units. It has also been adding value to its shareholders on a consistent basis and hence in the current state of affairs, it would neither be prudent nor practical to break down the bank into two or more units as suggestions are currently floating in the market.
