Time for Some Banks to Consider 'Plan B'

September 10, 2012 1:05 PM EDT
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With half the large banks in the U.S. not earning their cost of capital a 'Plan B' is needed, according to analysts at Goldman Sachs.

Three main issues are weighing on returns, according to the Goldman report: 1. Traditional banking profitability has declined; expense bases have not; 2. Legacy assets and exposures remain a meaningful drag; 3. Levering up is no longer an option, leveling the playing field. This new world implies that banks either need to be "best-in-class" in their chosen business lines/geographies or downsize, Goldman states.

Commenting on 'Plan B' options for some of the big banks, Goldman's analysts noted:

Citigroup (NYSE: C) - Spin-off North America real estate assets (within Citi Holdings) to existing shareholders to eliminate ongoing losses and outsized capital requirements; Write off the DTA without impacting Basel III capital in order to enhance returns and valuation greater than the decline in tangible book value. Potential upside from implementing 'Plan B' is 65%.

Morgan Stanley (NYSE: MS) - Reduce fixed income trading risk-weighted assets by more than the targeted 10-15% by 2014 in order to create excess capital for share buybacks; Accelerate the full purchase of MSSB from Citigroup at the midpoint of the two proposed valuation points to diversify the earnings stream. Potential upside from implementing 'Plan B' is 63%.

Bank of America (NYSE: BAC) - Execute on New BAC cost saves so that returns in operating businesses can more closely mirror those at JPM; Aggresively wind-down legacy asset servicing costs Longer-term, optimize capital structure to minimize deductions under Basel 3. Potential upside from implementing 'Plan B' is 35%.

Regions Financial Corp. (NYSE: RF) - Rationalize and reposition underperforming branches, potentially to in-store or other high-transaction areas to recoup lost service and transaction revenues; Divest Midwest footprint to focus on core Southeast footprint and free up capital to return to shareholders via buybacks or dividend increases. Potential upside from implementing 'Plan B' is 36%.

Zions Bancorp. (NASDAQ: ZION) - Restructure and simplify ZION's overly complicated and high-cost capital structure by retiring and/or replacing legacy capital at maturity/call dates in the coming years. Potential upside from implementing 'Plan B' is 39%.

KeyCorp (NYSE: KEY) - Divest legacy education lending loans in discontinued ops not held in trusts to generate additional capital for return to shareholders; Divest exit portfolio loans in continuing ops to generate capital for return to shareholders. Potential upside from implementing 'Plan B' is 49%.

In the 'Plan B' report, Goldman Sachs noted it added Regions Financial (RF) to its Conviction Buy List and removed Wells Fargo (NYSE: WFC).

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