Forrest I think Banc One and CNC are different.
Here's why Gary may dumped Visa/Master Card on to Wells Fargo:
From Barron's this week cover story on ONE:
interactive.wsj.com
Dimon likewise faces a huge challenge in turning around Bank One's
First USA credit-card unit, which was sup posed to contribute about 30%
of the parent's total income and be one of the engines of future growth.
Instead, First USA delivered but 10% of Bank One's profits in the first quarter.
The collapse in Bank One's credit-card operations provides an almost
textbook case of managerial bungling. To pump up growth,
First USA triggered a price war by carpet-bombing U.S. households
over the past few years with direct-mail solicitations, offering six-month
teaser rates as low as 2.9%. Naturally, this attracted new cardholders.
For a time, First USA even threatened to pass Citicorp in number of
cardholders and loans outstanding.
But last summer, the wheels began to come off. Customer defections suddenly
doubled to an annual rate of 16%, as a result of seedy new practices such as
eliminating the traditional five-day grace period for payments received after the
due date and slamming cardholders with immediate interest boosts and heavy
late-fee charges after two late payments in the introductory period.
A process of adverse selection ensued, in which First USA was left with many
cardholders who had poor credit or were paying at lower introductory rates.
The rate-surfers were able to move their balances elsewhere.
Delinquencies rose and chargeoffs jumped nearly a full percentage point in this
year's first quarter, to 5.78% from 4.89% in the year-earlier quarter.
The delinquency problem is likely to get worse over the next few quarters.
When accounts are likely to go bad, they normally go bad about
18 months after they are initially opened.
TA
----------------------------------------------------------------------
And the rest .............of the story...........
JULY 3, 2000
Fixer-Upper
Can Jamie Dimon restore Bank One's lost luster?
By Jonathan R. Laing
The honeymoon may be over for financial-services superstar Jamie Dimon, who just completed his first 100 days in the top spot of the beleaguered Bank One. The shares of the $273 billion-in-assets company have fallen more than 20% in recent weeks, to under 27, after rocketing near 37 on the news of Dimon's hiring in late March. The stock price is virtually unchanged from its level just before he signed on.
Downgrades of Bank One's stock have proliferated in recent weeks. And many have been issued by the very same securities analysts who, in March and April, had predicted that Dimon, 44, would turn around Bank One posthaste. Some of this recent pessimism is the product of fears that slower economic growth and higher interest rates have damaged bank loan quality. Downward second-quarter earnings revisions by such banks as Wachovia and UnionBanCal have put additional pressure on bank stocks. And word that First Union will take a $2.8 billion charge in the second quarter to shutter its recently acquired consumer-finance company, the Money Store (see Follow-Up), has only added to the gloom over the banking sector.
But Wall Street's disenchantment with Bank One also reflects a growing recognition that the Dimon makeover will take many quarters to pull off. After all, it took Dimon and his longtime mentor, Sanford Weill, over a decade to assemble the hodge-podge of insurance, brokerage and finance companies that turned Travelers Group into a powerhouse. In 1998, Travelers merged with Citicorp to form Citigroup, the world's largest financial-services firm.
A defining moment for Dimon and Bank One will likely come in two weeks, on the morning of July 19. Dimon will meet with analysts in New York, following the release of Bank One's second-quarter financial results to unveil the lineaments of his preliminary restructuring plan for the nation's fifth-largest banking concern. The plan represents the culmination of literally hundreds of hours of due diligence by Dimon and close aides who have tried to turn over every rock they could find throughout Bank One's far-flung empire, which covers 14 states in the Midwest and Southwest and employs 85,000 persons. To help him, Dimon brought in former colleagues at Citigroup, such as new chief financial officer Charles Scharf and senior vice president for strategy and planning Michael Cavanagh.
Dimon: Winning hearts and minds at Bank One. Wall Street will take more convincing.
No one knows exactly what impends from the Dimon Youth Corps -- Scharf and Cavanagh are both in their mid-30s -- but the medicine for ailing Bank One is likely to be strong stuff. Knowledgeable sources have told Barron's to expect a special charge to 2000 results of at least $1 billion, to slim down Bank One's bloated cost structure and clean up its still-messy balance sheet. This from a company that already has taken a restructuring charge of around a billion bucks in the fourth quarter of 1998 to cover merger-related and restructuring costs that resulted from the merger between Banc One and First Chicago NBD, and an additional $800 million in special charges in recent quarters largely as the result of serious deterioration in its credit-card and auto-leasing finance operations.
At Bank One, the non-recurring charge has become so recurrent that the company now uses the word "special" to characterize its writedowns.
Sources tell us that, in addition, the $1.68 annual dividend probably will be halved to keep Bank One's ratio of tangible equity to total assets above the all-important 5% level. Capital constraints also may dictate the sale of some assets and business units. Bank One operations in Utah and West Virginia, in which the company has a small presence, may go on the block. Dimon reportedly hasn't decided whether to dump the company's stand-alone Internet bank, WingspanBank.com, which Bank One's prior management started a year ago amid much fanfare and subsequent hemorrhaging of red ink. But the smart money isn't betting that Wingspan won't survive.
Some analysts already have picked up on the dose of bad news coming and some recent deterioration in Bank One's operations.
Though the First Call consensus forecast calls for Year 2000 earnings of $3 billion, or $2.61 a share, Credit Suisse First Boston bank analyst Michael Mayo recently dropped his number to $2.5 billion, or $2.20, to reflect "deteriorating commercial asset quality," deepening credit-card problems and the likelihood of a larger-than-expected special charge.
Mayo has become the literal "axe" on Bank One, having had a continuous "sell" rating on the stock since May 1999, just months before it began its sickening decline from above 60 to its current perch below 30. Ruchi Madan of PaineWebber likewise recently lowered her 2000 earnings projection to $2.20, based on her expectation that the coming charge could be as much as $1.5 billion.
That's a far cry from Bank One's 1999 earnings of $3.5 billion, or $2.97 a share, which itself included a special charge of $720 million. And the current 2000 forecast falls laughably short of the guidance Bank One offered to investors for year 2000 earnings back in the palmy days of late 1998. The company then saw 15% annual earnings growth as far as the eye could see, bulling the 2000 forecast to $4.60 a share.
The pessimism enveloping Bank One today dates back to the blunders of Dimon's predecessor, John B. McCoy. A third-generation chief executive -- his grandfather, John H. McCoy, took over the tiny Columbus, Ohio-based City National Bank in 1935 -- McCoy gunned the bank's growth, making 130 acquisitions in 20 years. Then, in a bid to catapult Banc One, as it was then known, into the big time, McCoy embarked on a series of deals that were ultimately his undoing. In 1997, he acquired First USA, a big credit-card outfit; a year later, he merged the firm with First Chicago NBD, itself the product of a 1995 merger between First Chicago and Detroit-based NBD.
The newly rechristened Bank One soon found itself awash in costs, largely owing to McCoy's laissez-faire approach to consolidation. Worse, a bungled attempt to rapidly expand the credit-card operation led to McCoy's ouster last December.
The accumulated weight of these missteps, combined with round after round of downward earnings revisions since last August, have ravaged the firm's share price and its credibility on Wall Street. Indeed, some 18 out of 24 analysts who follow the stock have "sell" or (the functional equivalent) "hold" recommendations on the stock. "There's growing recognition that Jamie is indeed facing a Herculean task in cleaning up Bank One, and that things will get worse before they get better," asserts the redoubtable Mike Mayo. His imagery is especially apt because Dimon is of Greek descent.
The gloom is justified, perhaps, but Barron's isn't quite persuaded of it. Nor are well-known value investors such as Bill Miller of Legg Mason Value Trust, which has laid waste to the performance of the S&P 500 over the past nine years in a row. Bank One is one of Miller's current favorites, though it should be added that his fund has been adding to a position in Bank One purchased at much higher prices. As of March 31, Legg Mason owned over 16 million shares of Bank One.
Much of Miller's optimism stems from the hiring of Jamie Dimon. In fact, Dimon's name was at the top of a list of suggested candidates Miller submitted to the bank board's CEO search committee.
A Miller associate says that Legg Mason has a "conservative" price target for the stock in the low 40s two years out, based on Dimon's history of delivering the goods and the hidden value that is expected to be unlocked when Bank One's credit-card operation recovers.
Likewise, the stock, which closed Thursday at 26 9/16, is cheap, based on last year's earnings of $2.97 a share or next year's First Call consensus estimate of $2.94 in earnings. As for 2000, it can be safely disregarded as the Year of the Big Charge -- especially if Dimon succeeds in rooting out all the problems at Bank One and keeping the cancer there from continuing to metastasize.
At 9 times earnings, Bank One trades at an attractive multiple compared to such peers as Citigroup and Wells Fargo, which boast price-to-earnings ratios of 18 and 16, respectively. Investors may also be giving short shrift to Bank One's many strengths, such as its enviable heartland presence in middle-market lending and retail banking.
And Bank One could achieve earnings of around $4 a share, just by fixing its First USA credit-card operation sufficiently to reach the average industry benchmark of profitability: about 1.5%1.75% returns on outstanding receivables. The standard isn't insurmountable. In 1998, the then-fast-stepping First USA earned 2.9% on its outstandings. Egregious management mistakes have since ground down returns on the unit's managed receivables of around $67 billion to decline to 0.6% in this year's first quarter. Credit-card income plummeted to $70 million in the first quarter from $303 million a year ago.
Ultimately, any investment in Bank One stock is a bet on Jamie Dimon and whether he can meet the high expectations of investors, the board that selected him and, perhaps just as important, frustrated Bank One employees, who are hungry for success. The question is something of an imponderable.
Banking is somewhat different than investment banking, securities brokerage, trading and insurance -- the businesses in which Dimon has the most experience. Yet this could be a boon rather than a hindrance in light of the recent deregulation of the financial-services industry. And for the first time, Dimon will be the commander-in-chief, rather than second in command. There can be a big difference in the two roles.
One thing is for sure. Dimon learned his craft from one of the shrewdest and toughest taskmasters, Sanford Weill. Dimon and Weill, in fact, go way back. Dimon's father, Ted, was a top-producing stockbroker for Weill at Shearson in the 'Seventies, and the two became social friends. The younger Dimon got a summer job at Shearson while still an undergraduate at Tufts University, on the strength of a term paper he'd written on the Shearson merger with Hayden Stone that Weill had engineered. The only reason an impressed Weill ever saw the paper was because Jamie's mother, Themis, slipped it to him.
After graduating as a Baker Scholar from Harvard Business School in 1982, Dimon was about to accept a job with Goldman Sachs when Weill asked him to be his assistant at American Express, of which he had become president following its acquisition of Shearson. Dimon left American Express after three years when Weill, disenchanted with the company's direction, bolted. The Weill group, in which Dimon fast became a key player, sat on the sidelines for over a year until taking control in 1986 of Commercial Credit.
This down-at-the-heels consumer finance company became the platform for a flurry of acquisitions and divestitures that eventually led to Weill's ascension to the throne of the financial colossus Citigroup. And Dimon was the key player, not only in lining up the deals but also making them work, whether it was the acquisition of Primerica (parent of Smith Barney) in 1988 or Travelers in 1993, or the mergers with Salomon Brothers in 1997 and Citicorp in 1998.
With each name change in Weill's burgeoning financial-services empire, Dimon's responsibilities increased. He was president and chief operating officer of the renamed Travelers over the seven years leading up to its merger with Citi. He was also co-head of Salomon Smith Barney after their merger. At Citigroup, Dimon was named president of the parent. He also was co-chairman and co-CEO of the company's investment banking and securities brokerage unit, Salomon Smith Barney Holdings. Then, in November 1998, he shocked Wall Street by suddenly "resigning" from Citigroup.
While some speculate that former Citigroup Co-Chairman John Reed lay behind Dimon's ouster, Reed and Dimon remain friends. Dimon's firing was, in fact, engineered by his longtime mentor, Weill.
Dimon has speculated to friends that Weill might have grown increasingly uncomfortable with the favorable coverage his protege was receiving in the financial press as Weill's heir-apparent. Weill was reluctant to cede power to anyone, as Reed found out before announcing his own retirement last February.
Cover Story, Part 2
Dimon has told friends that he believes Weill was angered by his refusal to okay the promotion of Weill's daughter, Jessica Bibliowicz, to head Smith Barney's entire asset-management business or to fill a position on the firm's executive committee. A year later, in 1997, Bibliowicz resigned from Smith Barney to take another job. Dimon has always been a stickler for strict meritocracy and avoiding any taint of cronyism. He didn't think Bibliowicz, though talented, quite measured up to the demands of the bigger positions.
Weill could not be reached for comment, though in an interview with The Wall Street Journal, he said that Dimon's departure was a result of a "situation that was not working as well as it might."
On the other hand, Dimon bears a measure of responsibility for the deterioration of his relations with Weill. Those close to him say he had a tendency to be abrasive with Weill, often second-guessing him on strategic and personnel decisions. The simmering tension between the two came to a boil following the Citicorp merger. Dimon kept badgering Weill not to finesse the political pressures in putting Citicorp and Travelers together, by appointing co-heads from each organization to key units. Citigroup became Noah's Ark, with two of everything. He also made known his feeling that Weill was increasingly surrounding himself with sycophants and toadies, according to Dimon associates. This was certainly no way to treat someone who had given Dimon such opportunities.
Dimon apparently asked Weill to lunch in Manhattan last December, after months of non-contact. Dimon told friends that his former boss seemed uncomfortable and nervous until Dimon broke the ice by apologizing for how he had acted in the later years of their business relationship. They departed on warmer terms.
But perhaps there's no greater testimony to the job Dimon had done for Weill than the fierce loyalty and esprit de corps Dimon had engendered among his subordinates. The day he left Salomon Smith Barney following his ouster, he got a standing ovation from the normally cynical denizens of both Smith Barney's and Salomon's cavernous trading floors. Dimon was visibly moved by the outpouring of emotion.
During the 15 months that Dimon was out of work, he was barraged with job offers. Among the positions dangled in front of him was the CEO spot at the British bank Barclays PLC, as well as chief operating officer at Amazon.com and more dot.com top-executive slots than he cares to remember, replete with huge options packages.
"In the end, it wasn't a hard choice," he remarked recently. "I love technology, but I figured that many of the dot.coms talking to me would ultimately fail or be consolidated. I loved the challenge of Bank One because, though it's obviously not in perfect shape, it's in the industry -- financial services -- that I know and enjoy. Look, there are about 30 companies of the size and complexity that interest me, and only infrequently is an outsider offered a shot at any of them."
With his years of experience in fixing companies for the demanding Weill, Dimon is brimming with confidence and optimism that he can turn around the likes of Bank One. "The company is in a lot better shape than Commercial Credit or Travelers were when we took them over," he says. "Commercial Credit was a thoroughly demoralized organization and didn't have all the fine employees that Bank One has. And at Travelers we had to dump a lot of businesses like health insurance and unbury ourselves from literally billions of dollars of bad commercial real estate."
Dimon hates to make large cuts in personnel such as both Commercial Credit and Travelers required. To Dimon, it's far more important to identify the right businesses to nurture with people and resources than to slavishly cut expenses across the board. If he must reduce head count, he says he'll use attrition. It's far less demoralizing.
That said, Dimon will need plenty of steel if he is to deliver on his promise to make Bank One the low cost producer. Its core banking expenses to revenues are currently running around 64% compared to an average industry "efficiency ratio" of 58%.
Consider, for example, that Bank One currently labors under seven different computerized deposit systems, a legacy of mergers past. To convert to one system and finally achieve economies of scale will take at least three years and about $150 million.
Dimon likewise faces a huge challenge in turning around Bank One's First USA credit-card unit, which was sup posed to contribute about 30% of the parent's total income and be one of the engines of future growth. Instead, First USA delivered but 10% of Bank One's profits in the first quarter.
The collapse in Bank One's credit-card operations provides an almost textbook case of managerial bungling. To pump up growth, First USA triggered a price war by carpet-bombing U.S. households over the past few years with direct-mail solicitations, offering six-month teaser rates as low as 2.9%. Naturally, this attracted new cardholders. For a time, First USA even threatened to pass Citicorp in number of cardholders and loans outstanding.
But last summer, the wheels began to come off. Customer defections suddenly doubled to an annual rate of 16%, as a result of seedy new practices such as eliminating the traditional five-day grace period for payments received after the due date and slamming cardholders with immediate interest boosts and heavy late-fee charges after two late payments in the introductory period. A process of adverse selection ensued, in which First USA was left with many cardholders who had poor credit or were paying at lower introductory rates. The rate-surfers were able to move their balances elsewhere. Delinquencies rose and chargeoffs jumped nearly a full percentage point in this year's first quarter, to 5.78% from 4.89% in the year-earlier quarter. The delinquency problem is likely to get worse over the next few quarters. When accounts are likely to go bad, they normally go bad about 18 months after they are initially opened.
A merger too far: Bank One's John McCoy (right) and First Chicago NBD's Verne Istock seal the deal.
First USA chief Richard Vague and the bulk of his aides have left Bank One within the past eight months. But there's still plenty of finger-pointing going on. The old First Chicago NBD crowd, centered in the corporate headquarters in downtown Chicago and in Detroit, still seethes with anger over the supposed bill of goods McCoy sold them in the 1998 merger of his Banc One with First Chicago NBD. Most of the cockroaches in the Bank One business portfolio, they say, whether First USA or its currently misfiring $7 billion auto lease loans, came from the old Bank One. McCoy, they complain, was long on vision but short on execution. (McCoy did not return a phone call from Barron's seeking comment.)
Yet surely First Chicago NBD can't be absolved of any blame in the Bank One drama. They sought out McCoy to do the deal and obviously messed up on their due diligence.
Dimon will be able to operate literally with a clean slate at Bank One following the expected mammoth special charge. The $1.5 billion charge predicted by PaineWebber's Madan would allow Bank One to completely write down its money-losing Internet and credit-card marketing deals, the underwater interest-only strips of its credit-card securitizations and the mark-to-the-market loss on some $10 billion of its security holdings. Moreover, the company will be able to bring its loan-loss reserve up to more prudent levels after several years of artificially boosting its earnings by skimping on loan-loss provisions. Finally, by including a $500 million restructuring charge in the overall writedown, Madan says Bank One will realize a billion dollars in pre-tax expenses over two years. That will more than pay for the $150 million in technology spending the company faces in consolidating its seven computer deposit systems.
Already, Dimon appears to be winning the hearts and minds of Bank One employees. He has barnstormed around the empire to address large crowds of employees at venues as disparate as the Chicago Theatre and Bank One Ballpark in Phoenix. He preaches unity, hard work, strict meritocracy and loyalty to the company. Even his cliches about putting the customer first seem to resonate with the crowds because they sense that he really means what he's saying.
Turnarounds are tough for anyone to pull off. But at least Dimon has been through the drill before. He's tenacious. It took he and Weill five years to push Commercial Credit's stock price up above its 1986 level. And he's obviously confident. Among other things, he invested $58 million of his own money in Bank One stock just before his appointment was announced.
If he believes that much in his own cooking, maybe investors should, too. |
