Bank One Reports Loss, While Guidance Raises Questions

Earnings Scorecard
Estimated*	Actual	Year-Ago
$0.45	- $0.44	$0.78

Updated from 11:13 a.m. ET

Bank One (ONE) reported an unexpected fourth-quarter loss Wednesday as it boosted the amount of money it sets aside to cover bad loans.

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The big bank said it posted a loss of $512 million, or 44 cents a share. Analysts had expected the company to earn 45 cents a share, according to First Call/Thomson Financial.

Included in the loss was a $1 billion pretax increase in the company's allowance for loan losses, which increased the quarter-end loan-loss reserve to 2.36% from 1.75% at the third quarter's end. In addition, the Chicago-based Bank One said it took a $200 million pretax charge for "occupancy and fixed asset decisions," a $225 million pretax increase in the reserve for auto lease residual losses, a $100 million pretax charge for miscellaneous balance sheet adjustments and operational errors and a $50 million pretax charge for incremental severance.

"These short-term results are absolutely unacceptable to our shareholders -- and to Bank One management," James Dimon, chairman and chief executive officer, said in a statement. He added that "the fourth-quarter results reflect the decisive actions we have taken as the result of our ongoing intensive review of businesses, systems, operations and the balance sheet as well as the deterioration of the economy and credit quality. We have dramatically increased our loan loss reserve, reduced expenses by more than $500 million annually, assembled an excellent management team and rededicated our efforts to serve customers and reward shareholders."

"I think the consensus was that there were going to be problems with credit quality," said Sharada Krishnappa, banks analyst at Parker/Hunter in Pittsburgh. But "I thought the spring cleaning was done in June," she added. Still, "it's better to clean the business now and prepare for a possible downturn." (She rates Bank One a buy though the rating is currently subject to review. Her firm hasn't done any underwriting for the bank.)

The Call

In a conference call with investors, a spokesman said this is "probably our last messy quarter," and added the "future starts in 1/1/01." But if Bank One's guidance for 2001 is looked at closely, there likely will be more messiness.

Dimon said analysts see Bank One earning roughly $2.70 to $3 a share. Assuming a charge-off rate of 0.8% to 0.9% of loans, the bank would hit the low end of the range, he said. But given that charge-offs already are at 1.1%, and the bank says it sees further credit deterioration in the months ahead, even hitting the low end of the estimated range may prove difficult.

Another trouble spot may lie in Bank One's exposure to the cash-strapped California utilities, several of which have warned they are on the brink of bankruptcy. When questioned about this, a Bank One spokesman downplayed the risk but then conceded the bank has "several hundred million dollars' " worth of exposure, not small by any bank's standards. Given the already substantial increase in nonperforming assets in the latest quarter, the prospect of shifting its loans to California utilities onto nonperformimg status will certainly make the already bleak 2001 outlook even darker.

The move to shore up reserves for loan losses may be viewed as reactive -- and late to boot -- by some analysts. After the quarter's hefty $1.5 billion charge to bulk up reserves, Bank One now how has a reserve ratio (the measure of the reserve as a percentage of loans) of 2.36%, which puts it near the top of its peer group alongside Citigroup (C), which has a reputation for solid credit quality. But unlike Citi, Bank One still has plenty of nonperforming loans to contend with.

Deteriorating Credit

And a look back at previous quarters shows that Bank One's reserve had been running down even as nonperformers were trending up, prompting speculation about why the bank hadn't moved to shore up credit quality earlier. Dimon himself said, "From the day I got here, credit has been deteriorating," referring to his arrival at Bank One last March.

Even aside from all the existing credit problems, sequential profit growth at the bank was weak across a number of business lines. In its commercial banking business, for instance, pretax income rose slightly from $337 million in the second quarter to $347 million in the third quarter, but then dropped off considerably to $244 million in the fourth quarter. Corporate investments went from a second-quarter gain of $50 million to a fourth-quarter loss of $49 million and corporate unallocated, a random mix of undesignated results, increased from a $191 million loss in the second quarter to a loss of $216 in the fourth quarter.

In the earnings presentation, Dimon was straightforward about the ways the bank needs to shape up. He called customer service "critical" but added, "We're still not that good at it." Focusing on expense reduction, Dimon said the bank is making progress and expects to complete reductions sometime in the first quarter.

The company's stock recently was up 50 cents, or 1.3%, to $38.81.

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