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Breaking up (banks) on Wall Street is hard to do

Investors like the sound of asset sales, but it isn’t clear executives at banks trading below book value will want to deal at a discount.

Merger breakup puzzle pieces
Andy Ryan | Getty Images

The chorus of voices that wants to break up Citigroup grew Monday.

Keefe, Bruyette & Woods analysts became the latest to chime in and suggest the bank will need to keep unloading assets to keep investors happy.

"Citi's valuation remains near the lows since the financial crisis and we believe that is a reflection of investor views about the ultimate return of potential of the company post restructuring," KBW analysts wrote. "The primary motivation for splitting up would be the faster return of excess capital to shareholders."

Investors responded positively to the report, and Citigroup stock initially got a modest lift in early trading Monday before reversing to a decline.

However, it isn't clear whether Citi executives will take the push to unbundle the bank seriously, even after years of its stock trading beneath tangible book value, or the value of a company's equity minus assets that could not be sold in the event of liquidation.

"I don't think this is a good time to be doing deals," said Christopher Whalen, senior managing director at the Kroll Bond Rating Agency. "Why would you want to roll out a business now, with comps trading near a 52-week low?"

Already, Citi has dealt assets in the wake of the financial crisis, nearly halving its market cap from roughly $250 billion in 2008 to around $130 billion today. At a time when regulators have increased capital surcharge thresholds to reduce banks' threat to the U.S. economy, some say Citi would do well to downsize yet again.

"Citigroup is clearly working on getting rid of things," said Erik Oja, U.S. banks analyst at S&P Global Market Intelligence. "Anything they can do to get a lower capital surcharge is good."

Citi is putting to a vote its shareholder proxy that would allow investors to weigh in on a bank breakup, thanks to Public Citizen financial analyst Bart Naylor, who drove several banks to weigh downsizing this year. Naylor, who last year unsuccessfully pushed Bank of America investors to consider breaking up the consumer bank, is prodding Citi and JPMorgan Chase to weigh similar measures this spring. Public Citizen is a nonprofit consumer advocacy group.

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"We should have lazy, stupid banks that take deposits and make 30-year mortgages," he said.

But Naylor's attempt to break up Bank of America got only 4 percent of the vote in 2015. And it's not clear he'll fare well this year either — it's the first time JPMorgan has included a proxy vote to break up, a company spokesman said, and CEO Jamie Dimon's bank has considerably outperformed Citi. Naylor said he also sought once again to include a proposal in BofA's annual shareholder meeting to break up the company, but it was dismissed on a technicality.

BofA declined to comment and a Citigroup representative could not be reached to discuss the KBW report.

It will take a better showing of shareholder votes for bank executives at JPMorgan and Citi to take Naylor's pitches seriously, Brian Kleinhanzl, equity research analyst at KBW, pointed out. Specifically, he said it will take at least 10 percent of shareholder votes to get management's attention. Even then, the analysts realize it could still take more.

"Our argument for breaking up may fall on deaf ears at Citigroup," KBW analysts wrote Monday.