Wednesday to put a positive, longer-term spin on the bad news revealed the previous evening about their First USA credit card business.
At an early-morning meeting with analysts and investors in New York, the executives outlined steps the company had already taken to improve service and prevent further customer defections from First USA.
The $256 billion-asset banking company, saying it would fall 8% short of its earnings target for 1999, placed the blame squarely on a combination of fierce price competition, narrowing margins, and service snafus.
"We are quite disappointed," said Mr. McCoy, president and chief executive officer of Chicago-based Bank One. "But we have got to look forward. It's a short-term problem and many of the appropriate steps to fix it have already been done. It's not life-threatening."
"We will certainly redouble our efforts," added Richard W. Vague, chairman and CEO of First USA, which has its headquarters in Wilmington, Del.
Mr. Vague sketched out a strategy to diversify First USA - one of the two largest credit card issuers, with $70 billion of receivables - by building home equity, specialty card and affinity marketing, and international credit card operations.
The presentation did little to sway market sentiment. Bank One's stock price closed Wednesday down 23%, or $12.625, to $43.
Other credit card specialists also fell: MBNA Corp. by $1.9375, to $28.125; Capital One Financial Corp. by $3.3125, to $43.375; Providian Financial Corp. by $3.9375, to $87.50; and Associates First Capital Corp. by $1, to $37.75.
"Somewhere along the line, (Bank One) lost touch with what made them a great company," said Nancy Bush, an analyst at Ryan, Beck & Co. She and others on Wall Street said they spent much of the day fielding phone calls from shocked investors.
Bank One bought First USA for $7.9 billion in June 1997, and analysts said it has since become the banking company's main driver of earnings.
Mr. Vague admitted that aggressive efforts to go after greater market share derailed financial performance. "We had an ambitious budget with targets that were higher than our peers and we were anxious to deliver," he said.
"They were stretching for market share," said Katrina Blecher, an analyst at Brown Brothers Harriman & Co. "It is going to be difficult for them to regain momentum."
Some market watchers now question whether Mr. McCoy and Bank One grew too dependent on credit card profits. "For a company of their size to sustain high growth was going to be very difficult," said Steven Reid, a portfolio manager at Harris Associates, a Chicago money management firm that owns six million Bank One shares.
Mr. Reid said that if Mr. McCoy had not previously set an ambitious 15% income-growth target, "we might not be so upset. This has hurt the credibility of management."
In its profit warning, Bank One said operating earnings this year would likely end up between $3.60 and $3.65 per share, 8% lower than Wall Street's consensus target of $3.92. The company calculated that the pretax impact to earnings would be between $480 million and $530 million, spread over the third and fourth quarters.
The third quarter would be hurt the most, the company said. As of Wednesday, consensus figures for that period were down to 88 cents, from $1.02. Fourth-quarter estimates have been revised to 91 cents a share, from $1.09. Bank One said it would accelerate its stock buyback program over the next four months.
The company said the problems were not related to the integration of First Chicago NBD Corp., which Bank One bought last year.
Mr. McCoy and Mr. Vague said First USA would devote more resources to home equity loans, specialty card products for small businesses and subprime consumer segments, and international credit card operations. "Our challenge is to grow and scale up these areas," Mr. Vague said.
The bank has $500 million in foreign credit card receivables. Mr. McCoy suggested that could grow to $3.5 billion, or 5% of total receivables, over the next two years.
At the same time, the banking company is reviewing other business lines and may divest those that do not meet profitability targets. The Internet bank launched in June - WingspanBank.com - will also continue to be marketed aggressively. "The worst mistake is to save money by not spending the marketing dollars," Mr. McCoy said. "We remain committed as ever to the credit card business," he added.
Executives said the problems first became apparent during a financial performance review in early July. It revealed significant compression in First USA's net interest margin, a trend that continued into August.
Mr. McCoy said he was stunned. "At first I thought it was fraud," he told a small group after Wednesday's meeting. "There are things we would have redone."
"How could this much happen this quickly in this business?" asked David Dreman, chairman and chief investment officer at Dreman Value Management LLP, a Jersey City money manager holding 6.3 million shares of Bank One. "They're supposed to have one of the best franchises, and this is such a statistical business."
