JPMorgan's Dimon Seeks to Wield Scalpel, Not Ax, in 2014

NEW YORK (TheStreet) -- Jamie Dimon expects to manage JPMorgan (JPM) surgically in 2014 and not with blunt moves as the nation's largest bank by assets tries to move past the record fines, criminal investigations and regulatory change that are casting uncertainty over its business.

Dimon said he expects to make surgical changes to adjust JPMorgan to regulations surrounding leverage ratios, capital requirements and the recent unveiling of the Volcker Rule, which seeks to curb proprietary trading at U.S. banking conglomerates. "We are doing the surgical stuff right now... The strategies of the business will not change." Dimon said at the Goldman Sachs Financial Services Conference on Wednesday morning.

"We have to adjust to this new world and the new world is going to take a lot of effort," he added.

Dimon's tone indicated that while JPMorgan has been flooded with scrutiny into its business in 2013, the bank isn't planning any major changes in the new year. A surgical approach also indicates that Dimon believes JPMorgan is in a strong position to adjust to the new regulatory environment.

About the recently announced Volcker Rule, Dimon said, "we will be able to manage with Volcker at this point." He also said that many banks, including JPMorgan, have gotten rid of the proprietary trading businesses the Volcker Rule targets.

He also indicated that nothing in the Volcker Rule will force JPMorgan to flee the U.S. in search of a less burdensome regulatory climate, a scenario that has been bandied about by many skeptics of regulatory reform. If Volcker undermines JPMorgan's competitiveness relative to foreign jurisdictions, it would be a problem, according to Dimon. However, he didn't appear to believe that would be the case.

JPMorgan was stung by roughly $6 billion in losses in 2012, as a result of a backfired credit derivatives trade that many hope would be barred under new regulations such as Volcker.

Control Issues

Dimon indicated the firm's compliance and controls will be the top priority in 2014. He called such operations "priority number one."

"We've got control issues we want to fix," Dimon said the conference. JPMorgan has been stung in recent years by trading losses and an onslaught of regulatory sanctions that have cut at the bank's profitability. Many civil and criminal probes also remain ongoing.

In November, JPMorgan agreed to pay $13 billion to a host of state and federal regulators to settle civil probes into the bank's sale of mortgage securities during the housing bubble. Dimon said on Wednesday that 80% of the activity referenced in the settlement occurred at buinesses such as Bear Stearns and Washington Mutual that JPMorgan acquired during the financial crisis.

He also said JPMorgan had decided to settle with regulators, even if it came at a premium, because a drawn out battle with regulators could have been more damaging to the firm. "You may have to pay a premium to settle, we thought it was a far better thing to do," Dimon said, while noting that shareholders had called him asking JPMorgan to fight the government.

At a November press conference, New York State Attorney General Eric Schneiderman characterized JPMorgan's $13 billion settlement as "a peace premium."

New ROE Targets

Because JPMorgan will be spending roughly $2 billion in 2014 to improve its controls, technology and compliance in coming years, Dimon said the bank will be adjusting its return on equity (ROE) forecasts at its investor day in 2014.

While JPMorgan currently carries a 16% ROE target, Dimon indicated that target could fall to 14% given a rise in expenses as the bank seeks to meet a new regulatory agenda. He also appeared confident that JPMorgan's expenses will fall in the long run, amid optimization efforts. A re-pricing of spreads in businesses such as revolving corporate credit lines and trade finance could also mitigate some of JPMorgan's near-term expenses and its falling ROE.

"All things being equal, our expenses will be higher and our returns will be lower," Dimon conceded.

No More Foot Shooting

Nevertheless, Dimon expressed optimism about JPMorgan's operating environment, particularly in the U.S. and among its investment banking businesses.

"I think investment banking could be stronger than many people think in 2014," Dimon said of the firm's advisory and underwriting businesses. He cited an expectation of 3% gross domestic product growth in 2014, and long-term economic growth trends in emerging markets in Asia and Latin America.

Dimon also said a budget deal brokered by Rep. Paul Ryan (R., Wisc.) and Sen. Patty Murray (D., Wash.) could resolve political uncertainty, which has cast a pall over an incipient U.S. economic recovering in recent years.

"I think this budget deal is a big deal," Dimon said. He added that he planned to send Ryan and Murray an email that said: "Thank you, thank you, thank you and God bless you."

-- Written by Antoine Gara in New York.

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