Regulators likely won’t break up the big banks, but if financial institutions' performance doesn’t improve, they may come under increased pressure to split themselves up, Thomas Michaud, CEO of investment bank KBW, told CNBC’s “Street Signs” on Monday.
“When you look at the valuation of the universal banks in the U.S., there’s a clear distinction between those stocks and the stocks of the super-regional banks,” the KBW chief said.
The big banks are trading at half the tangible book value that some of the big regional banks—like PNC Financial and USBancorp—are trading at, Michaud noted.
This valuation gap, and universal banks like Bank of America and Citigroup trading at two-thirds their book value, is “unsustainable,” Michaud said.
One of two things will have to happen. “Either the performance of the banks has to improve, or pressure will build on managements to shrink the bank, realize book value and possibly repurchase shares,” he said.
Michaud also said huge, global banks aren't necessary to meet the needs of most American companies. “There are some excellent super-regional banking companies out there that can fulfill corporate America’s needs,” he said, citing banks like PNC Financial , BB&T and US Bancorp .
But Michaud doesn’t expect regulators to forcibly break up the big banks. “We will have no ‘AT&T moment’ in the banking industry,” Michaud said, referring to regulators’ break-up of the telecom giant in the early 1980s. “Market forces are going to do it on their own. I think a lot of features of Dodd-Frank(explain this) will cause it to happen. The higher capital ratios that these universal banks have to have will drive a lot of the deleveraging.”
While the big banks may start slimming down, the small and mid-sized banks could start bulking up. “Basically, we think there will be more consolidation,” he said.
He added, “The higher performing banks will be the high-quality regional banks on down. We don’t think the highest performing banks will be the universal banks.”