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JPMorgan Chase's chairman and CEO, Jamie Dimon.
The nation's largest bank by assets, JPMorgan Chase , has found itself in the crosshairs of public opinion once again.
At the beginning of this month, analysts at Goldman Sachspublished a report suggesting that breaking JPMorgan "into two or four parts could unlock value in most scenarios."
The timing of the report was inauspicious, coming as it did on the eve of fourth-quarter earnings. As a result, JPMorgan's senior leadership -- and, by that, I mean chairman and CEO Jamie Dimon -- was forced to field multiple questions from analysts on its quarterly conference call about the feasibility of unlocking value by breaking itself into multiple companies.
While I covered Dimon's responses to these questions here, and thus won't rehash them, there's one point that bears further discussion. That is, arguably the best reason to keep JPMorgan essentially as a coherent unit, is because it's creating value for shareholders -- which, of course, is the purpose of a publicly traded corporation.
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You can see this by looking at JPMorgan's return on equity -- which is a ratio of how much a bank earns relative to the value of its shareholders' ownership stake.
Despite the turmoil of the last few years, the New York-based bank has generally returned at least 10% on its common equity. The most obvious exception was in the third quarter of 2013, in which JPMorgan's earnings were weighed down by $9.2 billion in legal expenses.
The 10% threshold is significant for two reasons. First, aside from Wells Fargo, JPMorgan is the nation's only too-big-to-fail bank that's been able to consistently post a double-digit return on equity since the crisis. By comparison, both Bank of America and Citigroup have struggled just to generate positive returns.
And the second reason is that a 10% return on equity signifies that JPMorgan is affirmatively creating value for its shareholders.
As I've written recently, it's generally assumed that a bank's cost of common capital is equal to 10% of said capital. Thus, in addition to fully compensating shareholders for their investment, JPMorgan is going above and beyond by generating excess returns on top of that.
It's also worth noting that JPMorgan is accomplishing this in a particularly adverse environment. In addition to the extraordinary legal and regulatory expense which it's had to absorb over the last few years, short-term interest rates remain near zero. Thus, JPMorgan is earning considerably less from its loan portfolio than it will once interest rates recover -- which, it's worth pointing out, could happen as soon as this year.
My point is that JPMorgan is not only currently earning its keep as a unified company, but that it can be expected to more than do so in the quarters and years ahead. This doesn't mean that JPMorgan doesn't deserve to be criticized, as it most certainly does, but it does mean that breaking it up isn't the right solution.
The article 1 Chart Shows Why JPMorgan Chase Shouldn't Be Broken Up originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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