JPMorgan's Dimon Starts 2015 on His Back Foot

Since JPMorgan Chase's lackluster quarterly results were no argument for megabanking, Jamie Dimon had to turn to big rhetoric instead to make the case.

His argument, of course, is that JPMorgan's $2.6 trillion in assets provide it a special advantage. Its customers benefit from its global presence, shareholders enjoy revenue and expense synergies that come with a diversified company, and American competitiveness even benefits from the company's reach, he said.

Yet the harder his sell got, the more the questions multiplied Wednesday.

"America has been the leader in global capital markets for the last 50 or 100 years. It's part of the reason the country is so strong," Dimon said during the company's conference call to discuss its fourth-quarter and 2014 earnings. "I look at it as a matter of public policy. I wouldn't want to see the next JPMorgan Chase be a Chinese company because someone has to be serving the global multinationals around the world."

The comment was among several responses Dimon gave to questions about whether the company should break itself up to lower its capital burden that weigh on returns. In the last month, CLSA and Goldman Sachs analysts have issued research notes that lay out the case for such a breakup scenario. JPMorgan executives had not previously commented on those reports.

"Even the people who wrote about[a potential breakup], talk about the superior franchises,

the benefits of synergies, the good things the company brings to bear," Dimon said. He added later: "we have good returns, we've got good market shares, we've got good customer [satisfaction] levels. The synergies are huge, both expense and revenue synergies, and some, not all, disappear under the various schematics of a breakup."

But to analysts like Mike Mayo of CLSA, the company is falling short of that promise. Mayo is particularly focused on the company's efficiency ratio. The company has a stated goal of reaching a 55% efficiency ratio, but it was 61% at the end of the fourth quarter.

Expenses fell 1% year over year last quarter and are expected to fall further in 2015, Chief Financial Officer Marianne Lake said during the call. The company will give more guidance related to its expenses and overhead-ratio goals during its investor day next month, she said. But she added that expenses were only part of the efficiency equation — the company needs revenues to rise, too. Revenues declined 3% in the quarter compared with a year earlier.

"You're going to see more of that leverage in 2016 and 2017," Lake said. "We'll continue to bring mortgage costs down, cost within the branches down, but offsetting against that hopefully we'll have stronger performance in some of our businesses."

In an interview, Mayo said the promises of efficiency in 2017 are unacceptable.

"The two issues at JPMorgan are the efficiency ratio and the penalty for bigness, and in the fourth quarter the efficiency ratio got worse and their assets went up 7%. If they are going to be big, they need to be more efficient," Mayo said. "The answer was insufficient. … Efficiency has stalled out for the last three years, and the answer involved 2017 so we have another two years to wait."

Dimon's "dismissive" attitude toward the breakup possibility does not jibe with results, Mayo said.

"I'm not buying it. If they can't better show the benefits of scale, then the topic remains on the table," Mayo said. "I'm not calling for a breakup, but you can't be dismissive of it as an idea."

Gerard Cassidy, an analyst at RBC Capital Markets, said "passionate" is probably a better way to describe Dimon and his team's aversion to the idea of a breakup.

"Dimon built this company into what it is today, so it is probably difficult given the sweat equity involved in making it a global brand to think of dismantling it," Cassidy said. "He is passionate about keeping it, but I also believe he is a numbers guy and recognizes that if the return on equity is challenged he might have to reconsider things."

Cassidy said he is encouraging investors to give the company time, specifically time to operate in a normalized rate environment to improve its efficiency ratio. As he sees it, the company does not have many more areas to trim expenses. For instance, compensation was 27% of revenue in the quarter, a low number for the industry, he said.

Still, Cassidy asked the executives during the call if they have any kind of pricing advantages given JPMorgan's size. Dimon replied that they are real in certain business segments but that broader advantages will rely on changes in the economy.

"It is this powerful and global firm, but if they can't get the benefits of that with higher pricing, maybe they are going to have reassess if it makes sense to keep the franchise as-is," Cassidy said. "I think it is too early to come to that conclusion, though…the capacity in the system is so great right now that even with their global reach the market is not permitting them to price their products higher."