Staff cuts alone may not be enough to turn J.P. Morgan & Co. around, analysts said after the company announced plans to reduce its work force by 5%, or 850 people.
The analysts said Morgan, the historically blue-chip commercial bank that recast itself as an investment bank, simply must work harder to win clients and do more business with them.
In a memorandum to employees Monday, chairman Douglas A. "Sandy" Warner said the staff reductions were necessary to improve operating margins and prioritize investments in key businesses like securities underwriting and asset management.
But the stated number of layoffs is seen as having a minimal impact on the bottom line.
The message was supposed to be motivational.
Goldman, Sachs & Co. analyst Robert B. Albertson described the memo as "a whip-crack" designed to rally the troops.
Mr. Warner said it is "imperative that we shift from developing our capabilities-the task of transformation-to achieving and capitalizing on leadership."
"As we grow," he wrote, "we will pare back where profit opportunities are uncertain or remote and cut excess cost from our infrastructure. ... We intend to redeploy people with relevant skills to areas targeted for growth. Where that is not possible, we unfortunately will have to reduce staff."
Mr. Warner vowed that 1998 revenue growth would exceed expense growth. Bank insiders, declining to comment on the record, said the goal is not to reduce expenses absolutely for the year, but to manage the growth so they do not outpace revenues.
Analysts said that would mean expense growth in the "high single digits" for 1998.
Market observers said Mr. Warner's document also did not appear to signal a shift in strategy. Since the early 1980s, when the bank first began building capital markets expertise, Morgan has had two goals: to be a global power and a bulge bracket player.
Both have been difficult to achieve, analysts and consultants said.
Morgan has seen its profitability ratios decline in recent years, while its peers among bank holding companies and investment banks like Merrill Lynch & Co. have improved.
For 1997, Morgan's return on equity of 13.4% lagged the 17.5% average for money-center banks and the 21% average for the investment banks Morgan would most like to emulate.
At the same time, Morgan's spending has ballooned, overshadowing revenue gains in key businesses like underwriting, advisory, and asset management. Last year, total expenses rose 13% while revenues grew 6%.
"Our rate of expense growth has exceeded revenue growth in three of the past four years," said Mr. Warner's memo. "Investment in building core business capabilities has driven that result ... stronger financial results must be a priority."
"They have done a great job growing revenues but they are lousy at bringing them to the bottom line," said David S. Berry, an analyst at Keefe, Bruyette & Woods Inc. He added that the top management's patience with the capital markets business may be wearing thin.
Unlike commercial banks that have recently bought boutique underwriting firms as the nucleus for capital markets activities, Morgan has spent billions of dollars building its own infrastructure since the early 1980s, analysts said.
The spending on capital markets accelerated after 1989, the year the Federal Reserve allowed Morgan to underwrite bonds for corporations. As restrictions in the 1933 Glass-Steagall Act, which separated commercial from investment banking, further eased, Morgan in 1990 gained additional stock-underwriting powers.
Relying on its position as a multinational bank and its century-old reputation as banker to blue-chip corporations, Morgan's aim was to be the global bank with full-service capabilities, analysts said.
But global competition intensified Morgan's struggle to manage expenses. "They had to play at all levels and in all geographies," Mr. Berry said. "That meant that they always had to spend some more money somewhere."
Competition in the United States, where established investment banks dominated securities underwriting, led Morgan to look to the developing world for growth.
The bank has been aggressively building operations in Asia and Latin America over the last three years. But the Asian currency crisis that began last summer and hit Morgan's earnings in the fourth quarter may have given management reason to pause and reconsider.
"The question is whether that money has been well spent, given that region's problems," said Lawrence Cohn, an analyst at Ryan Beck & Co.
Morgan may have been hurt by pursuing the bulge bracket-the top tier of investment banks like Merrill Lynch and Morgan Stanley, Dean Witter, Discover & Co. that dominate in stock underwriting-rather than focus on a few industry-specific niches.
Some observers said the top-tier strategy made it more difficult for Morgan to build revenues that would exceed expenses, despite having access to a blue-chip corporate client list for cross-sales.
Any large corporation has "a lot of investment banks trying to sell services," said Charles Wendel, president of Financial Institutions Consulting in New York. "That erodes loyalty."
Analysts expect Morgan's operations in emerging markets to bear the brunt of the job cuts.
Morgan has struggled with the Asian crisis, setting aside $587 million for nonperforming assets in the region and sustaining a 35% decline in fourth-quarter earnings.
Cutbacks could also come in asset management, a business Morgan has been aggressively expanding since it made a 45% investment last August in American Century Cos.
A Morgan spokesman declined to comment on specific areas where jobs would be cut.
"I think they are rethinking what they really need to be successful in those businesses," Mr. Cohn said. "They need to pace the investments" over a longer period of time.
Recent pressures from investors may also have prompted Morgan's top management to seek a merger partner. Mr. Warner, however, said in his memo that "no strategic merger yet envisioned matches the promise of our own growth strategy if we execute successfully."
Market analysts discounted recent rumors that Morgan had become a takeover candidate. "I think they would be a buyer rather than a seller," Mr. Berry said.
The turmoil affecting Morgan could spill over to other commercial banks trying to navigate their way around investment banking, analysts said. Few expect Morgan to be the last so affected.
"Morgan is mortal," said George Salem, an analyst at Gerard Klauer Mattison.
