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The term "Too big to fail" is considered by many as a phrase that will live in infamy. Perhaps it's a bit over-dramatic. But it certainly caused a lot of pain at the height of the credit crisis. Although there were several industries that were in trouble at the time, such as insurance and automobile, it is the banks, or specifically, the "Big four," that drew the ire of consumers and pundits questioning their need to be saved.

Regardless of which isle you were on, a decision was made. We can only speculate as to what would have happened if they were allowed to fail. Today, many are calling for the banks to break up. But this time, it's for the sake of investors. Some believe that shareholders will be rewarded with more value as the banks would boost profitability. But is it as simple as investors believe? And how much value (if any) would it unlock?

JPMorgan Chase (JPM) - No Breakup

Shares of JPMorgan are trading lower in pre-market activity, down almost 1% after the bank just reported better-than-expected profits with revenue coming slightly below Street estimates. Widely known as the "cleanest shirt in the dirty hamper," JPMorgan posted earnings of $1.59 per share and a 33% increase in net income, which arrived at $6.5 billion.

Despite the 3% decline in revenue, which arrived at $25.8 billion, JPMorgan managed to lower its provision for credit losses by $107 million, or 15%. The bank was able to gain $126 million from a wider spread of its own credit which was advantageous to the extent of 18 cents per share in earnings. What's more, even when this benefit was adjusted out, the bank still would have beaten consensus estimates by 3 cents.

It's worth asking, how much more value would a breakup create? While it's fair to say that had the bank been smaller, the disastrous London Whale trade would not have occurred. But much did that really affect investors outside a temporary embarrassment from the bank itself. In fact, the stock is up more than 40% since that announcement.

Mortgage banking remained solid with loan originations rising by 33% to $51.3 billion. It is clear that JPMorgan has a strong business and a solid franchise in investment banking, mortgages and retail banking. If the bank can continue to produce solid returns on equity in the low to mid single digits (12.5%) coupled with a discount rate of 9.5%, there is no question that fair value on the stock should be around $58.

As I've been saying for while now, the stock remains undervalued by (at least) 20%. And when coupled with the potential for share buybacks over the next several quarters and an improving balance sheet, this stock may still be the cheapest bank on the market.

Wells Fargo (WFC) - No Breakup

As with JPMorgan, shares of Wells Fargo are trading down almost 1% in pre-market. This is despite strong first-quarter earnings that arrived at 92 cents per share, which beat Street estimates by 4 cents. As with JPMorgan, Wells also fell short on revenue - posting sales of $21.3 billion versus estimates of $21.59 billion. However, given that profits soared 23%, how much more value would a breakup produce?

Besides, I don't think Wells Fargo qualifies as a "Big Bank" in the realm of JPMorgan. But that actually works to its advantage since the bank benefits from a business that is unburdened from unfavorable risk. The fact that Wells Fargo has limited exposure abroad also benefits shareholders since this limits impact from European fiscal concerns. Clearly, with profits up 23%, this is a business that has its act together.

Wells Fargo consistently demonstrates solid execution and leverage. And management has figured out ways to produce meaningful returns in both assets and its investments. This is despite prolonged weakness in interest rates. There's a premium placed for banks with above-average growth prospects that still meet certain criteria of safety.

By that standard, Wells Fargo is the best in the business. And I don't believe that a breakup here creates any more value than what already exists. From an investment perspective, the stock is trading at a considerable discount. Investors should expect gains of 20% as the stock should reach $43 by the second half of the year.

Citigroup (C) - Breakup Needed

Citigroup will be the next among the "Big Four" to report on Monday prior to market open. The Street will be looking for earnings-per-share of $1.21 a share on revenue of $20.15 billion. Given that both JPMorgan and Wells Fargo have beaten on EPS estimates while missing on revenue, it's hard to expect much deviation from Citi, which (more than any of the four) can benefit greatly from a breakup.

Fourth-quarter earnings weren't great. Citi posted net income of $1.2 billion, or 38 cents per share on revenue of $18.7 billion. When excluding items, the bank earned 69 cents per share - missing on both top and bottom lines as analysts were expecting revenue of $18.82 billion. However, I was willing to give the bank credit for a "less bad" quarter.

Nevertheless, Citigroup has been a tough name to figure out. Analysts want to love the company, but there are still some risks that have prevented the Street from diving in head first. Interesting though, Citi is the only one of the "Big Four" that has not received a downgrade. Despite the fact that the bank has reached new highs, analysts still maintain a buy rating.

While the bank has shown signs of a good turnaround story, in Citi's case, the sum of the part is more valuable than the whole. New regulations in areas like capital requirements are raising questions as to whether big global investment banks like Citigroup are investment-worthy. For now, although the bank is performing as well as can be expected, investors should consider that things can actually be better.

Bank of America (BAC) - Breakup Needed

Bank of America will report earnings on Wednesday April 17 before market open. The Street is looking for earnings-per-share of 23 cents on revenue of $23.39 billion. The bank is coming off a fourth quarter where it reported $367 million in net income, or 3 cents per share, on revenue of $18.66 billion. Not great numbers, but pretty solid relative to expectations.

Besides, when excluding debt valuation and other impacts, revenue actually arrived at $22.6 billion - beating estimates of $21.03 billion. However, profits dropped more than 60% year-over-year. Now, if the Street is calling for a breakup, I think there is justification here. But that's not an indictment on the bank. Profitability was impacted due to a $10.4 billion settlement reached with Fannie Mae that ate away a significant chunk of its earnings.

Still in the case of Bank of America, which qualifies as a "financial supermarket," there are various segments where considerable amount of value can be unlocked. These include consumer banking, wealth management, investment banking and several others. While a case can be made that JPMorgan meets this criteria, I just don't believe that JPMorgan's value is meaningfully impacted as a single entity to the extent of Bank of America and Citigroup.

For now, investors have to be encouraged that the bank has been working hard to clean up its messes. The good news is, in the process, it has removed several uncertainties related to profitability. What's more, that the consumer and business banking segments posted net income 15% higher demonstrates BofA's strong brand recognition. As it stands, these shares are still discounted to the bank's tangible book value.

Source: 4 Banks To Break Up Now, But Will It Matter?