Big Banks Should Break Up for Shareholders, says Mayo

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It’s fair to say that not everyone on Wall Street likes bank analyst Mike Mayo, probably because he’s often telling them things they don’t want to hear.

You could probably throw Mayo’s latest note onto that pile, as he’s out today suggesting that for the good of their shareholders the country’s biggest banks should break up into smaller, less risky units.

In typical Mayo fashion, he’s arguing his case just after a year in which the biggest bank of them all, Bank of America (BAC), saw its share price more than double. But that’s not going to deter him.

“The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price,� Mayo wrote. �When we ask, a large majority of investors indicate that breakups — divestitures, downsizings and de-mergers — would be good for stock prices.�

The goal should be �orderly� downsizing to achieve �safe banks� that have less leverage and lower risk, Mayo said. Zurich-based�UBS‘ strategy of cutting costs by exiting most of its fixed-income business is a good example, he said.

Mayo argues that bank stocks could double in price if risk and cost of capital were reduced. Among the ways these could be done, according to the Bloomberg piece, could be the divesture of Bank of America’s brokerage business, JPMorgan Chase‘s (JPM) asset management unit or Citigroup‘s (C) Latin America operations.

Mayo’s argument brings a market-centric perspective to what’s been mostly an economic and political discussion — supporters of breaking up the banks are usually trying to solve the too-big-to-fail conundrum. And shareholders are invoked, yes, but usually in the context of avoiding losses associated with financial crises. Mayo, on the other hand, is saying that stock performance would benefit from smaller banks.

After the introduction of the�Glass-Steagall Act�in 1933, which forced deposit-taking companies backed by government insurance to be separate from investment banks, price-to-book values surged, he said. That same thing could happen today, Mayo said, since many firms are trading below their book value.

There are simply fewer and fewer arguments for keeping the big banks as they are.