MyECheck, Inc. (fka MYEC)

[Cpickens723]

Pretty interesting article.


Source: Dow Jones News
By Emily Glazer
For James Dimon, chairman and chief executive of J.P. Morgan Chase & Co., there were the usual questions Wednesday about legal costs, net interest margin and compensation.

But then analysts homed in on the topic du jour, peppering the bank chief with possibly the largest question of all: Should he break up the bank?

In a testy two-hour conference call after reporting the bank's 6.6% decline in profit, Mr. Dimon made the case that J.P. Morgan--the nation's biggest bank by assets, with a $220 billion market capitalization--is worth more than the sum of its parts.

The topic has been buzzing through financial markets since Goldman Sachs Group Inc. analyst Richard Ramsden released a report Jan. 5 suggesting a split. Other analysts latched onto the idea, noting the New York bank is now a hard-to-manage, and hard-to-regulate, behemoth largely formed by the mergers of Chase Manhattan Corp., J.P. Morgan & Co. and Bank One Corp. It suggested ways the bank could divvy up its four main businesses: consumer banking; business banking; investment banking; and wealth and asset management.

"A lot of people just look at size, and it scares them," Mr. Dimon said. "But that isn't the SHYdeterminant."

Though he complained about being "under assault" from regulators and used an expletive when referencing the firm's occasional mistakes, Mr. Dimon argued that the bank is effective in its current form.

"The synergies are huge, both expense and revenue," he said. "The unscrambling would be extraordinarily complex...in debt, in systems, and technology and people."

Still, analysts pinged Mr. Dimon with a litany of tough questions about the firm's high legal costs, regulatory burdens and future, which some argue should include a breakup of the company. And they asked repeatedly about carving up the firm.

Of course, few if any analysts, or even the bank's critics, believe J.P. Morgan is close to breaking up the giant firm.

Nevertheless, the idea isn't new. Informal conversations took place a few years ago among some management before regulatory issues like capital levels were front and center, as they are now, according to people familiar with the conversations. The conversations were known as the "sum of the parts" discussions, the people said.

One point that came up was tax-related costs if the bank were to break up, one of the people said. Issues could include which unit would get tax benefits, which would get liabilities and where one set of taxes starts and ends, another person said.

Over the years, the board and management have had discussions about whether individual businesses could fare better alone, such as the investment-management part of the bank's asset-management unit, some of these people said.

The firm in 2014 exited from about a dozen businesses that are too risky or don't bring in enough money, such as the physical-commodities business, student-lending origination and some correspondent-banking SHYrelationships.

But Mr. Dimon said Wednesday that a full-fledged breakup doesn't make sense now, given market-share gains across its businesses, good returns and high customer satisfaction levels. Mr. Dimon said on his calls with analysts and the media that J.P. Morgan theoretically could break up--and would have to if regulators wanted that. But he warned that the move could make the U.S. weaker competitively at the expense of growing banks in China, especially when serving multinational companies.

And he outlined how he thought the bank could still generate high returns in its current form, emphasizing the bank can "manage through" higher capital levels. He also emphasized that the bank is more conservative since the financial crisis, and has less credit exposure and less risk as percentages of the balance sheet.

Still, there are a lot of issues with regulators, as evidenced by the bank's new $990 million in legal expenses largely related to continuing foreign-exchange settlement negotiations.

"Banks are under assault," he said on a call with media. "There are five or six regulators...coming after every single issue."

In the past, multiple regulators have fined J.P. Morgan on issues including its roughly $6 billion "London whale" trading loss and its involvement with Bernard L. Madoff's Ponzi scheme. Mr. Dimon acknowledged the bank sometimes makes mistakes and is "trying to stop stepping in dogs--, which we do every now and then."

Shareholders are divided on whether the bank should weigh a breakup.

John Hadwen, a portfolio manager at CI Investments Inc., which has about $340 million in exposure to J.P. Morgan through shares and warrants, says he isn't concerned about the bank's size, because it needs to service multinational companies. Toronto-based Mr. Hadwen said he is more worried regulators are making the institution less "investible" because they are making it harder for banks to recapitalize.

But others find the idea compelling. Steve Laveson, a portfolio manager at Portland, Ore.-based Becker Capital Management, said he thinks there should be three units: the corporate and investment bank; an asset-management unit; and the commercial bank paired with consumer and community banking.

"The three separate companies would aggregate to a stock that's 10% to 12% higher than where the stock is now," said Mr. Laveson, whose firm owns 913,000 J.P. Morgan shares, valued at close to $50 million.

J.P. Morgan's revenue slipped 2.8% to $22.51 billion, while revenue on a so-called managed basis, which compares with analyst estimates, dropped 2.3% to $23.55 billion. Analysts had expected revenue of $23.64 billion.

The stock fell $2.03, or 3.45%, to $56.81.

Saabira Chaudhuri contributed to this article.

Write to Emily Glazer at [e-mail]

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