Confident CEO Confronts Bank One's Many Demons

Against a bleak backdrop, Jamie Dimon charges forward.

Four months into his tenure, the executive put his stamp on Bank One (ONE) Wednesday with a wrenching restructuring. The bank took a staggering $2.94 billion in pretax charges and slashed its dividend in half in moves aimed at preserving its balance sheet. The charges resulted in a steep $1.27 billion quarterly loss.

But the CEO was jokey -- perhaps even cocksure -- Wednesday as he explained the shock treatment he's devised to revive the flagging Chicago-based bank. The dividend cut, for instance, was a "sign of strength," according to the former Citigroup (C) executive and onetime Sandy Weill protege. For now, what Dimon's statement called "strong medicine" has galvanized investors, boosting the stock 1 9/16, or 5%, to 31 9/16 around midday.

The Kitchen Sink

All the same, the drastic nature of the restructuring shows what poor shape Bank One is in. The charges include a $518 million charge at the retail bank, related to auto leasing; $673 million at the commercial bank, reflecting "significant deterioration during the quarter in the commercial lending portfolio," according to the bank's press release; $777 million at the First USA credit-card operation and $963 million in other charges.

And despite the executive's bravado, Bank One stock remains mired at barely half of year-ago levels. It hasn't significantly advanced since Dimon took the helm in late March.

A charge of this size often raises eyebrows among investors who wonder whether an incoming executive isn't simply clearing the decks, as the saying goes, to make earnings look better on his watch. According to this line of thinking, taking a huge charge now can enable a company to gain some momentum by posting upside surprises in subsequent quarters.

But Dimon bristles at the notion that he may be doing this at Bank One, saying that upfront charges don't guarantee operating improvements. "I don't look at it that way," he says of the kitchen-sink school of earnings management. He says his aim is to strengthen Bank One's balance sheet, and adds that doing so "doesn't guarantee success."

The charges are to be accompanied by deep cost cuts that Dimon expects will eventually propel sharp earnings gains. Bank One aims to save $500 million a year by cutting costs, and pegs 2001 earnings at between $2.86 and $2.99 a share. Analysts surveyed by I/B/E/S expect the bank to earn $2.96 a share for 2001, up 12% from 2000's $2.64 forecast but down sharply from 1999's $3.45.

Dimon said that after the restructuring First USA should report net income of around $1 billion a year. Before the charges, First USA made $113 million, or 55 cents a share, in the second quarter.

Bad Shape

The charges reflect a sharp boost in loan-loss provisions and a big balance-sheet restructuring, including the writedown of certain assets. Dimon's team is clearly correcting questionable past practices, something Dimon essentially admitted was the case with First USA, which he said was "burdened with aggressive accounting."

Perhaps the ugliest feature of the restructuring is the big boost in the loan-loss reserve: The bad loan provision in the commercial banking unit totaled $778 million, up $670 million from 1999's second quarter. A press release explained that there has been "significant deterioration in the commercial portfolio across several industries."

Giving it better protection against possible future spikes in bad loans, the bank's loan-loss reserve rose to a solid 1.73% of loans in the second quarter from 1.39% in the first quarter. That looks wise as nonperformers are climbing. Total nonperforming assets at Bank One jumped 7% from first-quarter levels, to $1.78 billion.

Unfinished Business?

Bank One shareholders may yet have more surprises in store. Even this raft of charges, which amounted to $1.9 billion, or $1.66 a share after taxes, may not have stemmed the bleeding. On the call, Dimon didn't rule out further charges. "Have we caught everything? I can't promise you that," he said.

The executive appeared to pour cold water on the notion that he may sell off large chunks of Bank One, like First USA or its Internet-only bank, WingspanBank.com. "We don't have major sales or liquidations" to do, Dimon said. Regarding Wingspan, he added, "The Internet is critical to our business."

Conspicuously, Dimon didn't announce a new head for First USA, the credit-card operation currently run by Bill Boardman, who has been at Bank One for 16 years. This will disappoint many observers, who were hoping that a well-known outsider would soon be drafted to revamp the troubled unit.

"Bill's going to stay," Dimon said at a Midtown Manhattan press briefing. "He is doing a terrific job."

Dimon noted that First USA's annualized customer-attrition rate fell to 13% in the second quarter, from 19% in the middle of last year. He also mentioned that some 15 new senior managers from Citigroup and American Express (AXP) had joined First USA recently.

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