Updated from 1:59 p.m. EDTBank One ( ONE - Get Report), the nation's sixth-largest bank, bet too early that interest rates would rise, and paid for it in its first quarter. The Chicago-based lender, which released results Tuesday, attributed roughly half of the 5% decline in its total revenue to "actions taken by the company to position for rising interest rates." In the quarter, Bank One's total revenue before interest expense slumped to $3.98 billion -- lower than in any of its prior four quarters. In a late afternoon conference call with analyst, Bank One Chairman and Chief Executive Jamie Dimon accepted some of the responsibility for the bank's bad bet on interest rates. "You can blame me a little," said Dimon. "We decided to hedge the balance sheet so rising interest rates wouldn't hurt us, and that cost us." Dimon explained that the bank used a hedging strategy involving U.S. Treasuries on the expectation that the Federal Reserve would raise rates in the first quarter. That didn't happen. "Obviously we did it too early, but we wanted to be cautious," said Dimon. While the conventional wisdom on Wall Street is that the Federal Reserve eventually will raise interest rates this year, it appears Bank One stands alone in jumping the gun. None of the other big banks that have reported first-quarter earnings experienced a similar decline in revenue, or mentioned placing a wrong bet on the Fed. Still, some say even if Bank One hadn't gambled, its first quarter numbers were nevertheless mediocre compared with those of other big banks. "All the other banks that I follow are posting healthier results," said Michael Stead, a Wells Capital Management portfolio manager who doesn't currently own any shares of Bank One. "You sort of got to ask yourself, what is going on here?" Shares of Bank One fell 51 cents, or 1.4%, to $36.34 a share.
On the surface, Bank One's quarter didn't appear that bad, despite the earnings miss. Net income in the quarter rose 4% to $818 million, or 71 cents a share, compared with 67 cents a year earlier. The Thomson Financial/First Call consensus called for the bank to earn 72 cents a share. But a closer look at Bank One's numbers shows some real weakness. Total net interest income -- the difference between the interest rate a bank charges on loans and its own borrowing costs -- fell in the quarter to $1.99 billion, a decline of 9% from a year ago. Total credit card revenue fell 2% to $1.1 billion. And banking fees and commissions dropped 4% to $440 million. Sean Jones, a Standard & Poor's bank analyst, said the drop in "core revenue" in Bank One's credit card division is a concern because the lender's card business has been a big revenue driver in the past. Similarly, Chris Marinac, a SunTrust Robinson Humphrey bank analyst, said he would have expected Bank One's card business to have turned in better results during a time when interest rates are still low, because low rates keep a lid on a bank's borrowing costs and encourage card users to spend more. He said it's possible that the United Airlines bankruptcy filing could have depressed usage of Bank One's popular United Mileage Plus credit card.
But the biggest problem for Bank One, Jones said, is that its "profitability still lags its major bank peers."