Advocates of breaking up the nation's megabanks just added a prominent ally.

Keefe, Bruyette & Woods, a New York investment banking firm known for its expertise in commercial banking, on Monday called on Citigroup to split itself up into two separate entities. Restructuring the company – the nation's fourth-largest bank by assets – would be a boon for shareholders, providing for a faster return of excess capital, KBW said in a note to clients.

Granted, even the report and one of its authors acknowledged that a breakup is unlikely to happen anytime soon, but it adds fuel to the debate over whether to force the biggest banks to get smaller and less complex.

The conversation has gained traction over the past few months. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, in February expressed support for busting up the nation's megabanks, citing the risks that they pose to the U.S. financial system. Kashkari's speech echoed the rhetoric of several key Democratic lawmakers, including presidential candidate Bernie Sanders, who has made reforming Wall Street a central tenant of his campaign.

Meanwhile, shareholders at both Citigroup and JPMorgan Chase are slated to vote on breakup proposals this spring at the companies' annual meetings. The votes were requested by Bartlett Naylor, a shareholder activist associated with the liberal lobbying group Public Citizen, according to a report last week in The Wall Street Journal.

A Citigroup spokesman declined to comment on the new KBW report, except to point to a defense of Citi's current strategy in its 2016 proxy statement.

"Over the past several years, the [Citi] board has hired several subject-matter experts to assist it in determining if the firm's chosen strategy was the most likely one to create the best long-term outcomes for our stockholders," said the proxy, which was filed last week. "Pursuant to its most
recent review, and having taken into account changes in the operating environment, the board remains confident that the current strategy being executed by the existing management team will yield the best long-term results."

Investors have started asking more questions "about how Citi is going to improve returns," Brian Kleinhanzl, an analyst with KBW and an author of the report, said in an interview when asked what prompted the report. Generating returns for investors will continue to be a challenge for Citi, as regulators push for higher capital requirements, he said.

The issue became even more timely last week when Citigroup, unlike several of its competitors, said it has no plans to ask the Federal Reserve this year to return more capital to shareholders. JPMorgan Chase and Bank of America, meanwhile, received permission from the Fed for additional shareholder buybacks.

Citi would be about 50% more valuable if it were split into two smaller units, according to KBW. Under the breakup scenario, the company could boost its estimated market value to $198 billion.

Under the breakup scenario outlined by KBW, Citigroup would split into two separate companies: Citi Consumer, which would include its retail and card units; and Citi Corporate, which would include investment banking, treasury management and other trading units.

A key justification for the separation is that, unlike its primary rivals, Citi does not provide the same scale of product offerings to its clients, including in the areas of wealth and asset management, Kleinhanzl said.

"We don't see as many synergies between the businesses," he said.

Additionally, under the KBW plan, Citi would sell off its international consumer businesses, including its troubled Banamex unit. Over the past year Citi has exited consumer banking in South America, including in Brazil and Argentina.

Selling off the units would further limit Citi's exposure to emerging markets, according to the report. It would also streamline the company's structure.

"We believe that a sale of international consumer would be viewed positively by investors since emerging markets have added to the boom-and-bust mentality regarding [Citi's] results," the KBW report said.

To be sure, Citigroup has slimmed down in recent years, slashing costs amid a multiyear plan to simplify the company and make it safer.

But it has largely struggled to get back on its feet after the financial crisis. It badly missed analysts' expectations in the fourth quarter, as core operating revenue declined 5% from the previous year.

Additionally, Citi shares have traded consistently below tangible book value since 2009, KBW said.

"We believe Citi's sub-tangible book valuation is reflective of the earnings power of the company," KBW said in the report.

KBW did not weigh in on Citi's upcoming shareholder vote, which involves a less specific proposal. Citi’s proxy statement, released last week, includes a proposal to appoint a committee of independent directors to decide whether the company should sell off its “non-core” business lines. The proposal recommends that Citi explore its options to “split the firm into two or more companies,” to reduce risk and boost shareholder returns.

Still, breaking up one of the nation's largest banks remains somewhat of a long shot. A similar proposal, voted on by Bank of America shareholders last year, attracted about 4% of votes. Also last year, a similar call to break up JPMorgan Chase mostly fizzled after Chief Financial Officer Marianne Lake and other executives launched a daylong defense of the company's megabank model as part of its annual investor day.

At various points in the report, KBW noted that it does not expect federal regulators or Citi's board to embrace a breakup plan anytime soon.

If the company continues to post lackluster results and boost shareholder returns, however, the issue will likely be pushed to the forefront, KBW said.

"What you're going to see is conversations increase over time," Kleinhanzl said. But it may take "more uprising from investors" to gain momentum, he said.

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