JPMorgan Can Learn Lessons From American Express & Citigroup (JPM, AXP, C)

JPMorgan Chase (NYSE: JPM) reports earnings on Wednesday morning.  Wall Street analysts are apparently looking for $0.93 EPS on revenues of $17 Billion according to First Call, although in this current environment it’s hard to imagine any bank or financial meeting or beating targets even if those targets have been lowered.  Analysts still expect a slight growth for 2008 and that just seems silly in the environment today.  But isn’t all bad at all banks and all financial institutions.

To say it is no secret that the financial sector is a wreck would be like saying you are an overpaid employee at the department of redundancy department.  Tuesday was a pain for JPMorgan shares as Deutsche Bank downgraded the rating from a Buy (with $56 target) down to a Hold (with a new $44 target) as the firm believes that even the famed and notorious JPMorgan Chase won’t be able to entirely escape the woes in the financial sector right now.  In fact, it fell worse than many other financials with a 5% drop down to $39.17 on nearly double volume and even slid to $38.50 in the after-hours session.

This particular report will be extra interesting, and it is actuallyfar more critical to the financial sector than others like Citigroup(NYSE: C).  The reason for this is that JPMorgan Chase is supposed tohave the strongest credit base in its client base.  It has a strongclient base like American Express (NYSE: AXP) does compared to manyVisa clearing member banks.  Regardless of this, you know there aregoing to be problems.  Chase’s delinquencies will certainly be upand it too will have charges, and if these analysts haven’t figured outthat it’s going to stay that way for a while then who knows what to sayabout them.  But Chase is also a survivor and deserves to be in abetter spot than the rest of the sector.  It’s also one of thepotential winners out of the Dogs of the Dow this year, as long as thissector can stabilize.  Unlike other banks and financials we havetelegraphed which others would cut their dividend, the JPMorgan Chase dividend is probably a safe one.

There are some key lessons that can be learned from what has happenedelsewhere.  We believe Jamie Dimon is more capable than we are inrunning that show but we want to make a reminder about WHAT NOT TO DO just in case he needs a play book.First off, American Express (AXP) should have been known by last week on its warning and it can no longer be a secret that there is more of that to come in delinquencies and charge-offs.  This is symptomatic rather than isolated to the poor and to subprime borrowers.  Credit just sucks right now, and yes I said that.  Vikram Pandit at Citi wasn’t strong enoughin demeanor during his Citigroup earnings call and didn’t have enoughof a plan for that disaster of a recovery that may take longer than anyof us want to stay in the business.  We warned that its plan was more importantthan the numbers and this proved it. The dividend cut wasn’t enough,the job cuts weren’t enough, the security sales are deemed expensive atthe cost of common stock holders, and we all know that the writedownsat most financial institutions are not just "not finished" but they can’t even really be quantified. 

Right now Wall Street wants a manager will guts that can stronglyconvince the public that their bank, even with higher delinquencies andeven with writedowns and losses, IS GOING TO MAKE IT.  Tough times hitalmost every sector and this is one of those times.  The strong surviveand the weak perish.  Jamie Dimon needs to NOT be apologetic, needs to communicate that this is the reverberation and consequences of the extremes that the cycle saw, and needsto come across stronger in answers than the analyst questions can be asked.  He also needs to be able to point to the fact that their books either don’t need cash or don’t need cash to the extent of the others.  Very few can pull that off in this environment.  Dimonhas to be one of those few.

Oh yeah, there is also that little issue about the mergers and acquisitions that may be mandated in the sector rather than preferred.  We gave a list of who is vulnerable preywhile they are down, and it’s Jamie Dimon’s job to determine whichbanking or financial leper has the cleanest gloves.  We don’t believethe old rumor of a JPMorgan-Citigroup tie up in the slightest.  But this is one of the survivors and in the food chain the strong eat the weak.   

Jon C. Ogg
January 15, 2008