JPMorgan Chase & Co. (JPM) recently entered into an agreement with Great-West Financial to vend its 401(k) record-keeping business and Retirement Plan Services to the latter. The deal is expected to close in third-quarter 2014.
The terms and conditions of the deal, which awaits regulatory approval, are not known. JPMorgan stated that its upcoming earnings will not be affected by the transaction.
The latest divestiture includes JPMorgan’s large to mega-sized plans. However, the company will retain its business in small plan space administered through the Retirement Link.
Retirement plan services and record-keeping business are alternative profit-yielding avenues for major banks like JPMorgan. Once the customers avail these plans, they have to invest for a long time period, which generates fixed flow of fee revenues for the bank. Further, the demand for these services is high as people prefer a steady income stream once they retire.
Now, this raises the obvious question: why JPMorgan is vending a substantial portion of this thriving business? Well, the latest move is one of the strategic decisions of JPMorgan.
We must understand that traditional banking business is core to banks and that gives them comparative advantage over any other businesses, for which there are dedicated companies in the same market. However, for additional profitability, banks often look into such alternate businesses. Now when their core profitability is at stake, banks tend to dispose the non-core units and redirect focus on core business.
This is what JPMorgan is exactly doing. It is carefully disposing its business to Great-West Financial, which is the fourth largest retirement plan record keeper in the U.S. Moreover, we believe that the proceeds from the sale will be utilized in the company’s core business, which in turn, will drive profitability in the long run.
Apart form the aforementioned divestiture, JPMorgan is merging its chief investment office (CIO.V) with its treasury unit. Craig Delany will head the merged unit. The news was first reported by the Financial Times, following the issuance of the company’s internal memo on Monday.
The ‘London Whale’ trading debacle led to trading losses of $6.2 billion in 2012. Since then, JPMorgan has been diligently restructuring the CIO that executed trading operations in an attempt to prevent malpractices involving risky ventures and raise investor security.
JPMorgan currently carries a Zacks Rank #3 (Hold). However, some better-ranked financial organizations include BankUnited, Inc. (BKU), Wells Fargo & Co. (WFC) and TD Ameritrade Holding Corp. (AMTD). All these stocks carry a Zacks Rank #2 (Buy).