J.P. Morgan Chase Reports a Weak Quarter, but Its Outlook Is Stronger

Building an investment banking platform pushes up costs, while merger progress looks good.
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For the most part, investors were understanding about J.P. Morgan Chase's (JPM) - Get Report weak quarter, as the newly merged bank swallows its medicine to get in shape for the year ahead. But now that the recovery period is behind it, the market will likely demand robust numbers in the year ahead.

"It was a pretty disappointing fourth quarter overall," says Sharada Krishnappa, banks analyst at

Parker/Hunter

in Pittsburgh. "There's a higher outlook out there for the next year. They are forecasting 10% to 12% revenue growth as well as 15% earnings-per-share growth over the next few years." (She rates J.P. Morgan Chase a buy, and her firm hasn't done underwriting for the bank.)

But Diana Yates, banks analyst at

A.G. Edwards

in St. Louis, says given the lumps the bank took this quarter, she would expect even better than that. "We would hope to see more than 15% over the year. You'd almost want it to be double that," she says. (She rates the bank a buy, and her firm hasn't done underwriting for it.)

The former Chase Manhattan unit has had to build a platform for its investment banking business, and it hasn't been cheap. The move involves integrating its earlier acquisitions,

Hambrecht & Quist

and

Fleming

, with its own business and more recently with that of merger partner J.P. Morgan.

Costs

In the latest quarter, the bank said operating expenses were 24% higher than a year ago, which reflects the buildup of the investment banking platform. "Higher investment banking costs outpaced revenue," says Krishnappa. Indeed, while investment banking operating revenue rose 20%, cash operating expenses for investment banking rose 37%. J.P. Morgan Chase said the expenses are "not expected to continue at a comparable rate in 2001."

One area in which the bank has been notably stable is credit quality. In the latest quarter, nonperformers (loans that are past due but which haven't been charged off yet) stood at $1.9 billion, down slightly from the third quarter. However, commercial charge-offs increased by $76 million from the third quarter.

When asked in its conference call Wednesday about

exposure to California utilities -- the question of the day -- J.P. Morgan Chase didn't elaborate on dollar amounts but said its guidance included its current view on utilities. Asked whether some utility loans had been placed on nonperforming status, a spokesman said the "situation is evolving rapidly as we speak. At year-end none

of the California utility loans were on nonperformer status, but there are certainly many that we are watching very closely."

Reeling Them In

The bank touted its merger progress to date, calling it "substantial" and saying it had made "up to 154 incremental pitches" (which can include offers of an advisory or underwriting role) that had a "positive reception." It estimates it has landed about 40% of the deals it has pitched. In December alone, the bank said it had $58 billion in announced deals. In addition, J.P. Morgan Chase said its guidance for benefits from the merger in 2001 remains at $1 billion in additional net revenue and $2 billion in expense savings.

Analysts and investors will be on the lookout for improvements in some of the most recent quarter's weak spots, including trading revenue, which fell to $1.27 billion from $1.48. The bank chalked up the weakness there to "widening credit spreads on results in emerging markets and North American credit markets."

The year ahead will likely feature some "do or die quarters," says A.G. Edwards' Yates, who says she would like to see the company rebound on the investment banking side and reap the benefits of its global strategy.

J.P. Morgan Chase closed Wednesday off 19 cents at $53 a share.