After a money-losing year of special charges, vexing shareholder lawsuits, and a rising number of bad loans, Bank One Corp. chief James Dimon at last has something to crow about. His Apr. 9 move to buy Wachovia Corp.'s $8 billion credit-card operation propels Bank One into a nip-and-tuck battle to be No. 2 in that business. More important, it's a big step out of the bunker for the beleaguered bank, which lost $511 million last year. "We spent the whole year hunkering down," Dimon says. "We've cut expenses, cut our exposures, and now we're going to grow in an area that makes sense for us."
No matter how bold the move may look, Dimon and Bank One are not out of the woods. A year after the charismatic Citigroup Inc. veteran rode in to turn around the nation's fifth-largest bank, with $269 billion in assets, he's doing battle on all fronts with a lackluster economy, a persistent rise in nonperforming loans, internal computer system headaches, and a once-stellar credit-card unit--First USA--that has yet to regain its mettle.
"CULT STOCK." Not surprisingly, skeptics abound. "They claim that [the Wachovia deal] is an indication that the card business is back on track," says Goldman, Sachs & Co. analyst Lori B. Applebaum. "I think it's too early to say that. We see no evidence that the business is growing." CIBC World Markets analyst Thomas D. McCandless complains that the bank still lacks growth plans. Under Dimon, he says, Bank One has become "a cult stock without the track record."
Indeed, the Chicago bank's fastest growth area of late is nonperforming loans, which more than doubled, to $1.8 billion, last year. Too many of the bank's borrowers are in trouble, from struggling Net consultancy marchFIRST to newly bankrupt Pacific Gas & Electric Co. And that's crimping profits as Dimon ratchets up reserves for bad debts. On Mar. 27, the bank said commercial loan losses for "the next several quarters will at least double," indicating it will take a $1.2 billion charge this year, vs. last year's $597 million--itself nearly twice the 1999 level.
RAISING THE BAR. Dimon is moving to cure the headaches caused by struggling corporate borrowers. He's even threatening to dump customers who borrow money from the bank but don't throw enough profitable fee business its way, such as cash-management services. Domestic corporate banking chief John E. Neal is combing through a list of nearly 1,800 such borrowers and warning those who might be weeded out. Says Neal: "[We've tried] to be more up front and direct about that with our current customers than we might have been in the past."
But Neal and Dimon need to tread carefully. Some corporate borrowers are responding to get-tough moves by Bank One and others by cutting the number of banks they deal with. "We need to rationalize our banks as well," says Chip Hoagland, finance director at AES Corp., a big borrower for power project construction. "We can't feed everybody." AES, he adds, does lots of fee-based business with Bank One and hasn't been threatened with a cutoff.
Unfortunately, Dimon can't afford half-measures. At times, lately, bad news from the bank has eclipsed his aggressive cost-cutting and other steps. Consider Bank One's back-to-back disclosures on Apr. 5. First it said it will pay a $1.8 million fine to settle charges by the National Association of Securities Dealers Inc. that the bank's capital-markets group violated federal securities laws because of accounting irregularities. Then came a costlier humiliation: an offer to pay $45 million to settle a shareholder class action charging the bank misled investors about the financial health of First USA in 1999. Bank One denied wrongdoing in both cases.
Dimon has moved fast to clean up operations at First USA. New managers have purged some 7 million inactive accounts, labored to lower customer-attrition rates to about 12% from 19% in mid-1999, and reduced delinquencies. First USA also cut sharply the number of new accounts opened. While such steps contributed to a 23% slide in revenue last year and a net loss of $1 million, they're expected to help First USA turn a consistent profit this year. As recently as 1999, the unit chipped in $1.1 billion of the bank's $3.5 billion net income.
Because Dimon believes that the credit-card business could again be a growth engine for Bank One, he has scoffed at speculation that he would sell the unit. "We love the credit-card business," he tells BusinessWeek. "It's a consolidating business and we're a really big player in it, and we intend to substantially improve our operations." Fittingly for the former Citigroup president, the Wachovia deal puts Bank One alongside MBNA and just behind Citigroup in the card business.
NIGHTMARE. But even if Dimon can again churn out big profits from an enlarged First USA, he faces thorny problems elsewhere. Since Bank One is a conglomeration of merged banks from across the country, just knitting together different computer systems is a nightmare. As the bank labors to meld seven deposit systems, for instance, it could face service problems that drive away customers. Moreover, the manufacturing downturn has slammed midsize corporate and retail customers in such Bank One strongholds as Ohio, Indiana, and Michigan. "Jamie Dimon is a great manager, but he's not Hercules, able to achieve mythical events," warns Prudential Securities analyst Michael Mayo, who rates the stock a "sell."
Meeting Wall Street's expectations this year could be tough. Most analysts expect the company to earn about $3 billion, a figure that even Bank One officials say takes a lot for granted. "That's assuming that credit-card defaults don't get worse from here--or consumer losses on the real estate portfolio [either]--and that commercial lending declines but not to the level it would in a full economic recession," says Charles W. Scharf, the Citigroup veteran whom Dimon recruited as chief financial officer.
Still, most investors seem to be giving Dimon the benefit of the doubt. At about $35 a share, the bank's stock is well above where it stood, at $28, just before he joined the company on Mar. 27, 2000. "They've started to turn things around," says David N. Dreman, whose Dreman Value Management funds hold nearly 6.7 million Bank One shares.
But building a track record takes time. Even if bulking up in credit cards pays off, it's only a first step. And plenty of people will be watching for a lot more--especially those who remember Bank One's glory days of seemingly unlimited potential.
By Joseph Weber in Chicago, with Margaret Popper in New York