(apologies if this has already been posted)
quote.bloomberg.com
/18 16:09
J.P. Morgan Shares Fall as Telecom Strategy Fails (Update12)
By Michael Nol and Helen Stock
New York, Sept. 18 (Bloomberg) -- J.P. Morgan Chase & Co. shares dropped after the second-largest U.S. bank said profit will fall short of forecasts as losses mount from a push to dominate lending to telecommunications and cable companies.
A quadrupling of bad loans to $1.4 billion in the third quarter from the previous three months and a plunge in trading revenue threaten to wipe out the bank's earnings for the period. Chief Executive Officer William Harrison has increased profit only one quarter since he created the bank in 2000 through the merger of Chase Manhattan Corp. and J.P. Morgan & Co. Last year, the combined bank earned less than a third of what Chase did in 1999.
``J.P. Morgan is in complete denial about what is going on,'' said Jeff Rode, an analyst for Segall Bryant & Hamill in Chicago, which sold its J.P. Morgan shares a week and a half ago. It manages $1.5 billion in stocks. ``They merged two big banks and it is not working. They have no management credibility at all.''
Shares fell 5 percent, or $1.11, to $20.44 on the New York Stock Exchange, 36 cents above their six-year low, after dropping to as low as $18.80. The yield on J.P. Morgan's 6 5/8 percent coupon notes maturing in 2012 rose to 5.69 percent from 5.52 percent.
Loan Losses
Loan losses soared after Harrison sought to win underwriting business by lending to companies such as WorldCom Inc. and Global Crossing Ltd. that since have collapsed. The bad loans are making it more expensive for J.P. Morgan to do business. Standard & Poor's cut the bank's credit rating one level yesterday to A+.
Trading revenue in July and August was $100 million compared with $1.1 billion in the second quarter. Chief Financial Officer Dina Dublon said on a conference call yesterday that J.P. Morgan lost money ``on positions taken across our dealer books.''
J.P. Morgan's derivatives portfolio, valued at $25.9 trillion based on the assets underlying the contracts, has heightened investor concern. Derivatives are a type of security whose value is tied to that of a stock, bond or other asset.
``We don't think the worst is over,'' Tanya Azarchs, an S&P analyst, said on a conference call. ``There is considerable risk of another bad quarter'' for J.P. Morgan.
Ten-year borrowing costs are 22 basis points higher for finance companies with J.P. Morgan's new rating compared with its old rating, or $2.2 million a year for every $1 billion borrowed. A basis point is equal to 0.01 percentage point. The company has $47 billion in outstanding debt, according to Bloomberg data.
Enron, Argentina
Harrison, who earned $21.9 million last year, also faces lawsuits and investigations related to its business with Enron Corp. and has suffered losses because of Argentina's debt default and currency devaluation.
``Management is running out of time,'' said James McLellan, who manages $4 billion in U.S. stocks for Insight Investment in London. ``Not only were they making mistakes two years ago on loans, trading losses are compounding the problems.'' McLellan said the stock is ``a painful hold.''M
Credit Suisse First Boston analyst Susan Roth, who rates J.P. Morgan ``outperform,'' lowered her third-quarter earnings estimate to break-even from between 50 cents and 55 cents a share, adding in a report that ``an operating loss cannot be ruled out.''
Merrill Lynch & Co. analyst Judah Kraushaar, who rates the stock ``neutral,'' reduced his estimate to 7 cents a share, and Morgan Stanley analyst Henry McVey is now forecasting 4 cents, according to reports published today.
Staff Cuts
Harrison, 59, yesterday said he may fire employees to cut costs with third-quarter profit from operations expected ``well below'' the 58 cents a share earned in the second quarter. The bank didn't indicate by how much it would miss forecasts.
Before the announcement, analysts were forecasting an average 54 cents a share for the July-to-September period, according to Thomson First Call. The bank reported profit from operations of 51 cents a share in the third quarter last year.
The company said in a statement it would continue to pay its 34 cent dividend ``provided that capital ratios remain strong and earnings prospects exceed the current dividend.'' The share price decline drove up J.P. Morgan's dividend yield, or the percent of its price represented by annual dividends, to 6.85 percent, the highest among the 24 members in the Philadelphia KBW U.S. bank index.
J.P. Morgan led other banks in arranging loans in 2000 and 2001 to telecommunications companies that borrowed a total of $1 trillion, according to Bloomberg data.
Telecom Loans
The bank arranged $86.7 billion in 2000 for a 13.8 percent market share and $62.9 billion in 2001 for a 16.4 percent share in a total of 187 loans. By comparison, Citigroup Inc., the biggest financial services company, arranged $78.6 billion of telecommunications loans in 2000 and $55.8 billion in 2001.
The 16-member AMEX North American Telecommunications Index has fallen 58 percent since January 1999, compared with a 28 percent drop in the Standard & Poor's 500 Index.
``They made bad credit decisions,'' said Stephen Berman, who helps manage $9 billion of assets at Stein Roe Investment Counsel. The company sold its stake in J.P. Morgan earlier this year. ``They didn't see the massive overbuilding in telecom. Their view of the future was flawed.''
J.P. Morgan's trading losses may be repeated at other investment banks, some analysts said. UBS Warburg LLC's Diane Glossman lowered her third-quarter profit forecast for Citigroup by 1 cent a share to 75 cents, citing J.P. Morgan's announcement. Citigroup shares fell 69 cents, or 2.3 percent, to $29.11 and are down 38 percent this year.
J.P. Morgan's problems have compounded after Enron's collapse spawned investigations by Congress and regulators into the bank's business with the bankrupt energy trader. J.P. Morgan, Citigroup and rival banks face lawsuits seeking more than $30 billion in claims related to the failure of Enron and WorldCom Inc.
Accusing banks of helping Enron and other companies commit fraud ``only adds insult to injury,'' considering the losses banks have suffered on loans, Harrison wrote in an opinion piece in the Wall Street Journal today. |
