JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC): The Decision to Spin Off a Private Equity Unit Could Impact Investors in a Big Way

Are Other Banks Vulnerable?

One of this deal’s drivers is the Volcker rule. Since the rule prohibits mainstream banks like JP Morgan from providing more than 3 percent of their private equity divisions’ capital reserves, it more or less renders such associations unworkable. While it is theoretically possible for a bank to maintain a private equity division under the terms of the Volcker rule, most banking executives are electing to avoid the problem altogether by spinning off these units. Many similar transactions have already occurred, and it would be reasonable for investors to expect more big banks to follow JP Morgan’s lead.

Possible Plays and Long-Term Outlook

Although investors cannot play this deal directly, an independent One Equity Partners might turn out to be a boon for JP Morgan. By releasing its private equity arm, the company may be able to cut costs in other areas. Moreover, its operational structure will become easier to understand and present less risk to everyday investors. Those who might normally be reluctant to jump into the still-recovering banking industry should be heartened by these developments.

Investors who wish to play this deal can do so with a long position in JP Morgan. The company’s stock has fallen slightly since the announcement of the spin-off and may be at an attractive buy-in price. Once the effects of the deal have worked their way through JP Morgan’s balance sheet, the company’s multiples could improve by a noticeable margin. Of course, interested investors should always perform supplemental research before playing a deal of this magnitude.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc (NYSE:C) , and JPMorgan Chase & Co (NYSE:JPM).
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Decision to Spin Off a Private Equity Unit Could Impact Investors in a Big Way originally appeared on Fool.com is written by Mike Thiessen.

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