Update: Bank One to Take $1.9 Billion in Charges

Updated from 8:34 a.m. EDT

Beleagured Bank One (ONE) said Tuesday that it was cleansing its balance sheet by charging off more than $1.9 billion after taxes in the second quarter in an ongoing restructuring plan.

At the same time, Citigroup (C), the nation's top financial services company, said Wednesday that its second-quarter earnings rose 23% and beat Wall Street analysts' expectations, while Chase Manhattan (CMB) also topped estimates, although it saw its earnings fall 8% from the same period last year.

Bank One said it lost $1.27 billion in the second quarter, or $1.11 per share. In comparison, the Chicago-based banking giant earned $992 million, or 83 cents per share, in the same period last year.

Jamie Dimon, Bank One's chairman and chief executive who came aboard in March, said in a statement: "Our top priority is to quickly position Bank One to compete more effectively and enter 2001 in the strongest financial position possible. We are taking strong medicine to build a healthier future."

Analysts were expecting a significant charge, but the size was surprising, said Joseph Duwan, an analyst at Keefe, Bruyette & Woods who covers Bank One. "We were expecting about half that," he said. "(Dimon) did a pretty convincing job (persuading people) that he did clean house, and that the balance sheet has integrity at this point."

Bank One also said it expects 2001 earnings per share of $2.86 to $2.99, although Keefe's estimate is a bit more conservative at $2.80. Duwan has a market performer rating on the company and his firm has not performed underwriting for Bank One.

Excluding special items, Bank One earned about $600 million, or 55 cents a share, Dimon said. Analysts expected the company to earn 63 cents a share, according to First Call/Thomson Financial.

Since last August, when the bank revealed problems with its credit card business, the company has reported disappointing earnings. Dimon's appointment was part of a restructuring plan aimed at turning around the bank's fortunes.

Since the beginning of the year, the firm, which is the nation's fifth-largest bank holding company, has slashed its workforce from 86,600 to 82,500, where it will stay, the company said. It also shuffled its management team in the second quarter, hiring a new chief financial officer, chief legal officer and head of strategic planning.

Meanwhile, Citigroup's second-quarter earnings per share came in at 87 cents, compared to 71 cents earned in last year's second quarter. It was up 4 cents from the 83 cents per share that Wall Street analysts had estimated, according to First Call/Thomson Financial.

New York-based Citigroup's profits were $3 billion, up from $2.45 billion in last year's second quarter, on revenue of $16.78 billion, up 10% from $14.95 billion in the same period a year ago.

Citi's board also announced a four-for-three stock split, in the form of a 33.3% stock dividend, payable Aug. 25 to stockholders of record Aug. 7. The board also authorized the purchase of $5 billion worth of Citi stock, primarily to fund employee benefit plans.

Investment bank Salomon Smith Barney, the largest contributor to Citi's revenues, had a tough quarter, due mainly to lower commissions, trading and investment banking income. Salomon's second-quarter core income of $641 million was down 33% from the first quarter's whopping $957 million, though it did manage a 5% increase from 1999's second quarter.

Credit cards, the second-largest revenue generator at the bank, appeared to have a reasonable quarter, although the division is clearly struggling to post sustainable growth. While cards' second-quarter core income of $308 million was 10% above the year-earlier period's $279 million, its revenue was actually down, by 1%. Cards therefore had to rely mainly on a lower loan loss provision to post the profits growth.

However, there were a number of bright spots for Citigroup in the second quarter. Earnings in the emerging markets-focused segment of the global corporate bank, which serves large corporations, rose 29% to a sizable $370 million in the second quarter. This represented 12% of Citi's core income, the largest single contribution from any business line. However, emerging markets' income was down slightly from the first quarter.

Global relationship banking, also part of the global corporate bank, managed to earn $259 million in the second quarter. That number is 76% above 1999's second quarter, making global relationship banking Citi's fastest-growing segment in the quarter.

Despite turbulence in Nasdaq stocks, Citi's investment activities line, mainly made up of venture capital revenue, still managed to earn $234 million in the quarter, up 44% from the year-ago period, though it's way down from the first quarter's $634 million.

Citigroup didn't show any signs this quarter that bad loans are becoming a problem, as is the case at several of the nation's banks. Loan losses totaled $726 million in the quarter, which is below the level in the year's first quarter as well as in 1999's second quarter. That said, the bank did let its loan loss reserve slip as a percentage of loans, suggesting that it's more comfortable about the outlook for credit quality. The loan-loss reserve was equivalent to 2.46% of loans in the second quarter, down from 2.63% in the first quarter and 2.90% in the year-earlier period.

Alan Klauber, the director of equity research at Cochran, Caronia Securities, said Citigroup did better than expected in both its U.S. banking business and its international corporate business even though it faced a tougher domestic credit environment and jittery financial markets globally, which affected many firms' underwriting business in the second quarter. "They had a very strong quarter," said Duwan, who has a buy rating on Citigroup. Cochran has not been an underwriter for Citigroup.

Fellow banking giant Chase Manhattan said Wednesday that its second-quarter earnings-per-share figure was 95 cents, up 12 cents from the 83-cent Wall Street consensus, according to First Call/Thomson Financial. However, in last year's second quarter the bank earned $1.03 per share. Its operating revenue was up 2%, to $5.799 billion from $5.685 billion. Operating earnings fell 9%, to $1.299 billion from $1.43 billion.

Like Citigroup, Chase saw a decline in earnings from private equity-related investments, due mainly to the decline in technology stocks on the Nasdaq. Its underwriting fees also fell, as companies put IPOs on hold. Net gains from venture capital investments fell to $298 million from $513 million in last year's second quarter.

In late trading Wednesday, Bank One was up 2 3/8, or 8%, at 32 3/8, while Citi was up 1 3/8, or 2%, at 68 1/16. Chase was down 1/4 at 50 11/16.