JPM a Rare Firm with Free Capital

When James Dimon takes the microphone Thursday at JPMorgan Chase & Co.'s annual investor day, he won't have to address nationalization talk — unless it's about somebody else's bank.

He won't have to talk about any heroic measures to raise capital — unless it's about somebody else's bank. And when he discusses how the company expects to remain profitable and maybe even return to acquisitions, analysts are likely to give him the benefit of the doubt, just as they did Monday when he described a surprising 87% reduction in JPMorgan Chase's dividend as a "precautionary measure" and freely discussed a role for the bank as an industry consolidator.

JPMorgan Chase's chief executive is, in some ways, the last man standing. He's the only CEO of the largest banks who still has the leeway to talk about spending money — either to boost deposits by buying another bank, possibly one that fulfills his aspirations for a larger Southeast presence, or to expand fee businesses such as wealth management, brokerage, and asset management. When the time comes, analysts suspect Mr. Dimon will be able to expand without much outside resistance and with the support of regulators.

"We predict that they will get through this cycle without losing money in a single quarter," said Jason Goldberg, an analyst at Barclays PLC's Barclays Capital. "They are one of the few global financial institutions playing on their front foot, which gives them the ability to be opportunistic and reinvest in the franchise."

Betsy Graseck, an analyst at Morgan Stanley, is among those who accept Mr. Dimon's forecast of a profitable 2009 and his continued openness to acquisitions, saying both are what set the company apart from its largest competitors during the recession and financial crisis.

"Citi can't say that they'll be profitable," she said. "Bank of America could probably say it, but I'm not sure there would be a lot of credibility right now."

Though Mr. Dimon has carefully positioned JPMorgan Chase as a conservatively run company since taking the helm in December 2005, it has been overly eager at times. Most notably, the $2.2 trillion-asset New York company aggressively expanded in mortgages in 2007 in a move that gave it double-digit market share just as the market was cooling and prices began to fall. What has helped the company avoid intense criticism from Wall Street has been a willingness to readily admit mistakes and, perhaps more importantly, keep the company profitable.

A company spokesman would not comment further, but Mr. Dimon has been candid in the past about how he views expansion efforts.

"I can tell you categorically that we did it too early, but that's life," Mr. Dimon said about the mortgage expansion during a March 2008 American Banker interview. "We'll get over it." Unapologetically, however, he said the only way he knows to face a difficult operating environment is to learn "how to mitigate it and how to take advantage of it."

His rationale is perhaps more timely now, given the hits being absorbed by Citi and B of A: "Even when competitors stumble, it's temporary."

Mr. Goldberg said the key for Mr. Dimon has been that JPMorgan Chase has avoided the types of costly miscues that have crippled its competitors' financial results and capital levels. "They've made mistakes, but they just haven't been big mistakes," he said. "And certainly nothing that would threaten to bring down the company."

Last year, the company seemed to time its expansion efforts better, swooping in to buy Bear Stearns Cos. and Washington Mutual Inc. in government-brokered transactions, either obtaining some backstops from regulators or bargain-basement pricing. On Monday, Mr. Dimon said Wamu "so far is pretty much as we expected" and remains on pace to earn $2.5 billion this year.

On Monday's call with analysts, Mr. Dimon characterized trading results at midquarter as "strong" and fee income as "solid." The company is forecasting $2 billion in first-quarter writedowns within its investment bank, which took a drubbing in the fourth quarter, losing $2.36 billion after taking $2.9 billion of writedowns on leveraged loans and mortgage-related exposures.

JPMorgan Chase has $80 billion in capital now and anticipates an additional $5 billion when it cuts its dividend to a nickel this quarter.

Nonetheless, JPMorgan Chase has plowed ahead in some instances when others have showed newfound timidity, and it remains unclear whether the moves will yield benefits or problems. In the fourth quarter, the investment banking unit continued to buy mortgage assets, collateralized loan obligations, and credit-related products because, as Mr. Dimon put it in a Jan. 15 earnings call, "we are getting enormous spreads that are very safe and sound."

Ms. Graseck said how the company emerges as a consolidator "all boils down to availability, price, and fit." She declined to identify specific potential targets.

Mr. Goldberg, in a note to clients Tuesday, wrote that he believes JPMorgan Chase could look overseas. "Given potential opportunities abroad, we wonder if the company has the appetite or wherewithal to examine opportunities," he wrote. He would not comment further, citing a Barclays policy barring analysts from discussing mergers and acquisitions.

Analysts will be listening Thursday for any guidance and clues on where JPMorgan Chase will redeploy capital. On Monday, Mr. Dimon gave few specifics on direction, instead emphasizing that the point of the conference calls was to remove a "cloud" that a dividend cut might cast over the investor day, which he asserted would "focus on the company and its future."

"To date they've made more good decisions than bad," Mr. Goldberg said, reflecting the general sentiment of those that follow the company. "We just hope they continue to put their capital to use intelligently."

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