J.P. Morgan Still Chasing Relevance

More than a year after the merger, the megabank is struggling to grow revenues.
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One of the biggest unions in the history of banking got another black eye this week when Moody's lowered its long-term credit outlook on

J.P. Morgan Chase

(JPM) - Get Report

. More than a year after tying the knot, the bank is still struggling to make its scale relevant in an anemic economy.

On Thursday the credit rating agency changed its long-term outlook to stable from positive. In a statement, Moody's said, "The outlook change reflects our opinion of the sharply reduced prospects for revenue synergies and market-share gains in the current investment banking and capital market environment. As a result, J.P. Morgan is relying more heavily on cost-cutting to generate benefits from the merger."

Moody's said J.P. Morgan's exposure to



wasn't part of its decision. The rating agency even reaffirmed the bank's outlook after Enron's bankruptcy announcement. "The bank is too big for any one company to be the straw that breaks the camel's back," said Peter Nerby, senior credit officer at Moody's.

Instead, the change was made because the revenue and earnings growth predicted by Morgan and Chase at the time the deal was announced has yet to materialize. "The company still needs to show progress on the synergy front," said David Hendler, an analyst at CreditSights, an independent securities research firm.

Somewhere to Put It

According to Hendler, the merger made sense when it was announced, because of its ability to offset the banks' weaknesses: "J.P. Morgan diluted Chase's venture capital exposure, while Chase gave J.P. Morgan a bigger balance sheet necessary to be successful in capital markets." But he says the company still needs to decide where it wants to place its focus.

"Even though they have a lot of capital, they've got to be more strategic about how they're going to invest it in the future," Hendler said. The firm has been a leader in lending and high-grade bonds, and it's gaining market share in the merger and acquisitions arena. But among Hendler's questions is its commitment to branch banking and to the retail broker business.

In the third quarter, J.P. Morgan Chase had operating earnings of 51 cents a share, down 27% from a year ago. Investment banking fees totaled $807 million, lower by 24% from the third quarter of 2000. JPMorgan Partners, the firm's private equity unit, reported an operating loss of 8 cents a share.

"In this challenging environment, we think the best strategy is a tight focus on controlling risk and expenses," said William Harrison, CEO of J.P. Morgan Chase, in the firm's third-quarter earnings statement. "As the markets return to a more normal environment, our strategic platform will provide significant positive operating leverage."

Bad Timing

As for the merger, "it may have been ill-timed," said Andrew Collins, a research analyst at U.S. Bancorp Piper Jaffray, "but the job cuts have been important."

Some experts think that when the economy turns around, it will take J.P. Morgan Chase with it. "This is a rough time for the financial services industry," said Martin Sikora, the editor of

Mergers & Acquisitions

magazine. "Revenue growth will depend on what happens in the economy and to capital markets."

Possibly working in the firm's favor is its valuation: J.P. Morgan currently trades at a

price-to-earnings multiple of 9.9, using 2002 earnings estimates, a big discount to the

S&P 500's

price-to-earnings multiple of 23.

Since the merger was announced on Sept. 12, 2000, the combined entity's stock is down 29.6%. It's off 18.7% this year, while the S&P 500 is down 15.2% and the Philadelphia Stock Exchange/KBW Bank Index is lower by 8.6%.

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