NEW YORK ( TheStreet) -- JPMorgan's ( JPM)
$7.2 billion legal hit in the third quarter may be dismissed by some analysts as "non-core" to its business, but the truth is the legal challenges are changing the bank in a very fundamental and permanent way. In a slide on page 15 of its investor presentation, the bank outlines steps being taken to simplify its businesses and tighten its controls in response to the new regulatory and legally charged environment. The company plans to exit a number of businesses it considers relatively unimportant to its customers or those that have outsized operational risk. This includes student lending, physical commodities, identity theft protection and credit insurance, co-branded business debit cards and gift cards and Canadian money orders, to name a few. Some of these exits have been previously disclosed. The bank also said was lowering its resk by by discontinuing relationships with certain clients including lending to check cashing businesses, clearing services for 500 foreign banks, checking accounts for certain foreign domiciled clients and so forth. The bank is cutting these business lines to minimize risks related to money laundering and other legal and reputational risks. Shedding those businesses may mean losing a "couple hundred million dollars" in revenue, according to JPMorgan Chase CEO James Dimon. "I think it's a core business principle to always simplify your business and to focus on where you can really win," Dimon told analysts during the bank's earnings conference call on Friday. At the same time, the bank is making a sizeable investment in boosting its internal controls. "We want to be best in class. We want to get Six Sigma. Its become a number one priority," Dimon said. The bank is spending a billion dollars on stepping up controls and is dedicating more than 5,000 employees to the effort. Some of that investment is "permanent" Dimon said. So while legal costs should trend down over time, many changes to the business could be here to stay. Dimon also acknowledged that new capital and liquidity requirements will affect client pricing. The steps towards simplifying and de-risking the business "could take years," he said.
Still, the CEO remained upbeat about maintaining the bank's profitability in the future. "We think we've maintained pretty good margins and pretty good capital and we have different ways to optimize and notall of the things we're simplifying were very profitable," he said in response to an analyst's question about future profitability. Dimon also said "we're comfortable we'll be able to adjust to the new world and still have great businesses and again, you haven't seen all of the repricing that might take place, you haven't seen the reactions and change in business strategies and some things may move to the shadow banking world, which is fine." Dimon's confidence is usually reassuring, but not all analysts are convinced that the operating performance of the bank will remain unaffected. "These actions taken by the bank reflect my view that the operations of the company are being impacted by its battle with the United States government," Rafferty Capital Markets analyst Dick Bove wrote in a report earlier this week. "The predominant view is that once the bank makes a large settlement with the government all business activity returns to normal and the bank earns at least $20 billion." "While I have not adjusted my earnings estimate as yet, I do not share this view," Bove wrote, adding "I believe that the short-term and secular earnings of the company have been negatively impacted by the changes being forced upon the company." Charles Peabody of Portales Partners has a similar view. "The regulators and the
Obama Administration want to remove benefits of being big," Peabody said in an August interview with Bloomberg. "You're seeing that in the way they're imposing capital restraints, the liquidity requirements, and now if you are too big too manage, they're going to raise the costs of litigation for being too big to manage," he said at the time Most analysts remain bullish, however, arguing that the stock's valuation more than discounts the future risks. The bank is expected to shed more light on its repositioning at its Investor Day in February. Shares of JPMorgan Chase were up slightly in afternoon trading, to $52.70. -- Written by Shanthi Bharatwaj in New York.