Facing pressure to either fix his ailing bank or sell it, acting Bank One Corp. chief executive officer Verne G. Istock on Tuesday asked Wall Street to believe that he can rebuild profits by the end of the year.
Mr. Istock told a roomful of skeptical Wall Street analysts that the company will take a $725 million charge in the fourth quarter, slicing earnings for the period in half but helping to begin the repair of the battered First USA Inc. credit card division.
"We stumbled badly in our credit card business," Mr. Istock said. But "we know what caused the problems and are working hard to fix them."
Including the charge, the $264 billion-asset banking company said it expects a "disappointing" profit of $2.94 a share for the full year and 36 cents a share for the fourth quarter of 1999. Earnings are expected to be even lower for 2000, with an operating profit target of $2.80 to $3 a share.
The company also announced that it has hired the executive search firm Russell Reynolds Associates to conduct a national CEO search, making Tuesday's meeting in New York perhaps the biggest job interview of Mr. Istock's life.
But knowing that Mr. Istock's job is on the line did little to comfort worried stock analysts. "New CEOs typically bring a whole management team with them, so we may be back here in six months with a whole new strategic plan," said one buy-side analyst.
The $725 million charge includes several restructuring items that would be better left to a new CEO, said Diana Yates, an A.G. Edwards & Sons Inc. analyst. "He may want to clean house, but they seem to have put the cart before the horse."
Mr. Istock said the bank has little option but to heal itself. A sale of either Bank One or First USA at its current low prices would be unthinkable. "The value of our franchise far exceeds what the stock price would indicate," he said.
And Bank One cannot continue to watch its credit card business erode while it settles on a new leader, he added.
The plan unveiled yesterday would revamp the credit card division by cutting marketing expenses, raising introductory interest rates slightly, and concentrating on retaining current cardholders. The company promised to abandon aggressive cut-rate pricing tactics and to stop loading customers up with high fees and penalty charges. Instead, it will try to rebuild its franchise by beefing up customer service.
First USA head William Boardman said his division aims to cut customer attrition rates from 16% last year to 14% in 2000 and 12% in 2001. That still won't equal the 9% level the company achieved in 1998, he said, but it will allow the company to return to average card industry profit levels in 2001.
The company also said it will reassign automobile lending and consumer finance groups, which had fallen under First USA, to the retail group. That will leave First USA to concentrate on credit cards and its Internet start-up, WingspanBank.com.
Some analysts said they were encouraged that the bank was making efforts to fix profitability in the credit card unit. "They are taking the right steps with retention and customer service," said Henry C. Dickson, an analyst with Salomon Smith Barney, a division of Citigroup Inc. "Competition is fierce, and if you want to remain standing, you have to hold on to what you've got first."
Still, others said they were wary. With less aggressive marketing, the company only expects to sign up three million new customers this year, down from nine million in 1999.
"It will become very difficult to get momentum in the credit card business," said Katrina Blecher, an analyst at Brown Brothers Harriman & Co. "Where is the growth going to be? It seems like they have turned off the spigot" that made the credit card division a high flyer in years past as it recruited a constant stream of new customers.
First USA officials contend that the market will not support that kind of high growth anymore.
Mr. Istock sought to distance himself from the team that made the overly optimistic growth predictions when First USA was bought by Bank One in 1997, reminding the audience that his former bank, First Chicago NBD Corp., did not merge with Bank One until 1998.
Mr. Istock said performance in the company's other divisions - retail, commercial banking, and investment management - was on track. He added that Bank One would continue to invest in growth areas while fixing First USA. By concentrating on non-credit card businesses, Mr. Istock said, Bank One could realistically return to 10% to 12% earnings growth after this year and eventually gain a better stock price.
In a nod to the company's retail focus, the banking company said will delay implementing merger-related conversions in Michigan and Florida indefinitely. Officials said they don't want to rile retail customers with more changes at this point.
The company will also narrow its focus by selling off about $15 billion of "noncore assets," particularly loans. Chief financial officer Robert Rosholt said the moves would not have a material effect on the company's bottom line, but several of the loans will garner premium bids.
The $725 million charge will come in four areas: $200 million would go to additional reserves to meet new regulatory requirements, $185 million for writedowns of assets at First USA, $80 million to pay for deteriorating car loans, and another $260 million for restructuring, including possible layoffs and office closings.
Wall Street so far seems unimpressed by Mr. Istock's reform plan, although most analysts seemed to agree that the company's solid franchise would make a healthy Bank One worth well more than its $30.25 price at the close of trading Tuesday, unchanged from the previous day's trading. The bank's shares have lost half their value since Bank One's credit card woes became public last year.
Officials at the bank said they did not expect their announcements to stave the decline in their stock price immediately. "This will be done in a disciplined, sustainable manner, not through quick fixes," Mr. Istock said.
Charles Keenan contributed to this story. Related Stories:
Higher Prices, Lower Spending Key Parts Of Turnaround Plan
Istock Appears An Also-Ran For Bank One CEO As Outsiders Eyed