(guess it pays to be "not morgan" )
quote.bloomberg.com
10/16 15:07
J.P. Morgan 3rd-Qtr Profit Falls 91% on Bad Loans (Update10)
By Michael Nol
New York, Oct. 16 (Bloomberg) -- J.P. Morgan Chase & Co.'s third-quarter net income plunged 91 percent as the second-largest U.S. bank wrote off more loans to telecommunications and cable companies and lost money in investment banking.
Net income fell to $40 million, or 1 cent a share, from $449 million, or 22 cents, in the same period last year. J.P. Morgan's division that underwrites and trades securities and makes corporate loans lost $256 million.
Chief Executive Officer William Harrison plans to cut more than 2,000 investment banking jobs and scale back business in Asia and Latin America after failing to boost profit for seven of the past eight quarters. J.P. Morgan's stock has dropped about 50 percent this year, the worst performer in the Dow Jones Industrial Average. Its profit is lower than that of any of the 10 biggest U.S. banks.
``These guys screwed up,'' said Marc Halperin, who helps manage $185 billion of assets including J.P. Morgan shares at Federated Investors Inc. ``There should be a change of management there. If I ran a portfolio the way these guys run their bank, I would have lost my job already.''
Harrison, who was paid $21.2 million last year, defended his efforts to dominate loan syndication and expand investment banking.
``Our mistakes have been mistakes of execution, not of strategy,'' Harrison, 59, said on a conference call with investors and analysts.
Citigroup
J.P. Morgan's earnings contrast with that of its larger rival Citigroup Inc., the world's biggest financial services company and the bank Harrison has set as a model for his own business. Citigroup said yesterday that third-quarter net income climbed 23 percent to $3.92 billion, a fourth straight quarter of profit growth.
Citigroup Chairman Sanford Weill is making money in investment banking -- the bank's Salomon Smith Barney unit earned $1.2 billion in the third quarter -- while his consumer business is almost three times as profitable as J.P. Morgan's, largely because of a bigger credit card portfolio.
Standard & Poor's, Moody's Investors Service and Fitch Ratings downgraded J.P. Morgan in the past month to three levels below Citigroup, increasing J.P. Morgan's borrowing costs. Citigroup, with $1.03 trillion in assets, now pays about 65 basis points less a year on its debt than J.P. Morgan, which has $742 billion of assets. A basis point is equal to 0.01 percentage point.
``Just compare Citigroup and J.P. Morgan,'' said Olgerd Eichler, who manages about $650 million for Union Investment GmbH in Frankfurt, including J.P. Morgan shares. ``They are more or less in the same business and it's been the difference between day and night.''
Shares Fall
J.P. Morgan shares dropped 46 cents, or 2.5 percent, to $18.15 at 2:57 p.m. in New York Stock Exchange composite trading. Citigroup shares fell 52 cents, or 1.5 percent, to $33.62 and have lost about 29 percent this year.
J.P. Morgan would have lost money in the quarter had it not booked $578 million of gains from selling securities, about $300 million higher than is typical for the bank over three months, said Keefe Bruyette & Woods Inc. analyst Michael Corasaniti.
Corasaniti expects the bank to have profit from operations of $1.70 a share in 2003. Analysts in a Thomson First Call survey were expecting $2.59 before today's announcement. J.P. Morgan's third- quarter profit from operations totaled $325 million, or 16 cents a share, excluding merger and other charges. Analysts polled by Thomson First Call forecast 7 cents.
Chief Financial Officer Dina Dublon said the bank will continue to pay a 34 cents a share dividend as long it earns enough to meet payments over the long term.
Investment Bank
J.P. Morgan's investment bank, led by former BankAmerica Corp. Chief Executive David Coulter, was unprofitable in the third quarter as trading revenue plunged 68 percent from a year earlier to $365 million. The bank is also the world's biggest trader of derivatives, securities whose value is derived from debt and equity securities, commodities or currencies.
The bank took ``the wrong positions in our equity derivatives, convertible debt, cash equities,'' Dublon said on a conference call with reporters. ``We have had trading losses in many of our trading areas, particularly in the early part of the quarter.''
Some of J.P. Morgan's rivals, such as Goldman Sachs Group Inc. and Citigroup, reported a rise in trading revenue in the third quarter from gains in bond and currency trading. Merrill Lynch & Co., the biggest securities firm by capital, said today that revenue from principal transactions, which includes institutional brokerage and trading for the firm's own account, dropped 49 percent to $377 million, hurt by declines in stock and stock derivatives.
Write Offs
J.P. Morgan wrote off $834 million of bad loans to companies in the third quarter, more than quadruple the amount of a year ago. Those losses were mostly in the telecommunications and cable industries, the bank said.
The bank plans to lower limits on the amount of loans it can make to a single company and keep loans to any given industry about 3 percent to 4 percent to limit potential losses, Vice Chairman Marc Shapiro, who is in charge of risk management, told investors.
Some rivals have improved the quality of their loan portfolios. Wachovia Corp., the fourth-biggest U.S. bank, reported third-quarter net income of $913 million as it wrote off fewer bad loans and boosted consumer deposits.
Bank of America Corp., the third-largest U.S. bank, said profit rose as it set aside less money for bad loans and made more mortgage and credit-card loans. The bank said third-quarter commercial loan write-offs fell 17 percent to $394 million.
J.P. Morgan has ``misexecuted on the corporate loan book in a larger way than Citigroup and Bank of America,'' James McLellan, director of international equities at London-based Insight Investment Ltd., which manages about $90 billion, including 500,000 J.P. Morgan shares. ``That's where J.P. Morgan has fallen down. That's a mess at the moment.''
IPOS, Mergers
J.P. Morgan also has suffered amid a 31 percent decline in global mergers and acquisitions this year, and the slowest U.S. initial share sale market in 25 years. Investment banking fees fell 34 percent in the third quarter to $533 million.
The jobs cuts and other moves aimed at reducing annual expenses by $700 million in J.P. Morgan's investment bank will cost the bank about $300 million in the fourth quarter and a further $150 million after that, the bank said.
The bank plans to scale back business in Latin America, where J.P. Morgan has lost money from Argentina's debt default and currency devaluation. J.P. Morgan said it had about $300 million at risk in the country at the end of the third quarter, down from $400 million three months earlier.
``They really don't have a complete handle on the depth of what's gone wrong on the credit side for them,'' said Charles White, president of Avatar Associates, which manages about $2 billion of assets and doesn't own J.P. Morgan shares. ``For us, there's just too much uncertainty there.''
FleetBoston
FleetBoston Financial Corp., the seventh-biggest U.S. bank, also has been hit by losses in Latin America. The bank reported today third-quarter profit fell 24 percent on Argentine losses and loan defaults by telecommunications companies.
Like many of its rivals, J.P. Morgan benefited from strength in consumer borrowing as mortgage rates have dropped to their lowest in 30 years. The bank's 528 branches, credit cards and mortgage lending division had profit of $807 million, almost double the amount of a year earlier, led by a more than tripling of mortgage profits.
Citigroup's profit from credit cards, consumer loans and branch- banking rose 13 percent to a record $2.2 billion, enabling the bank to overcome a drop in underwriting and advisory business and growing loan losses.
J.P. Morgan said last month that third-quarter results would fall ``well below'' the 58 cents a share in operating profit earned in the second quarter. |
