We looked at valuation levels for BAC, C, and JPM by splitting them up into IB and non-IB portions of the companies and analyzing both segments on a price to book basis. This gives a rough assessment of what the IB and non-IB segments of the companies are worth if the IB portion were to be spun-off. See the following exhibit for a list of IB and non-IB comps that we utilized in this analysis. Our analysis utilizes equity allocations as disclosed by the companies to the IB and non-IB.

The low probability risk of splitting into two companies is not a significant concern for our current ratings on the stocks. Why? o Current PB valuations for the IB and non-IB businesses are pretty similar at 1.1x and 1.2x

Target valuations are higher for the IBs at 1.6x vs. 1.2x for the banks

Total company leverage is modest at 10-12.7x for BAC, C, JPM
JPM will be allocating more capital to its IB, to be announced at analyst day on Feb 25, 2010. Currently at 20x, we estimate it reduces its IB leverage to 12x to be in-line with C and BAC. Non-IB leverage would rise from today's low 10.7x to 13x

Eoin Treacy's view If one were to take the balance sheets of the major diversified investment banks at face value, one could potentially argue that they are being maltreated by the selloff in their portion of the financial sector since last week's announcement. However, the fact remains that their balance sheets are far from transparent and any uncertainty regarding their future earnings potential is going to be greeted with a wide degree of uncertainty among investors. (Also see Comment of the Day on January 22nd).

This ratio of the S&P500 Banks Index / S&P500 Diversified Financials demonstrates that the two indices performed in line with one another for most of the last year but the Banks Index broke upwards last week. A sustained move below 0.40 would now be required to question scope for the Index to continue to outperform the Diversified Financials since this portion of the sector has the greatest degree of uncertainty relating to it.