Eight days before shareholders are scheduled to vote on their merger proposal, Chase Manhattan Corp. and J.P. Morgan & Co. warned that fourth-quarter profits will be "substantially lower" than expected but argued that recent market-related struggles actually reinforced their commitment to the deal.

Not surprisingly, a slowdown in capital markets activities and markdowns on private equity investments hurt the companies. But there were other problems - compensation expenses jumped in the quarter and Chase said results at its consumer business might decline from third-quarter levels. "The outlook is certainly more challenging than we might have hoped for," Marc J. Shapiro, vice chairman and head of finance and risk management for Chase, said during an early-morning conference call.

Still, the companies said they are committed to their merger, which would create the third-largest U.S. banking company, with assets of $660 billion. Chase revised its original projections, saying post-merger cost savings and incremental revenues would amount to about $3 billion, more than $1 billion higher than predicted in September. Mr. Shapiro and other executives said the combination of Chase's client base and Morgan's broader product mix would enable the company to weather financial storms.

"The long-term value of the company has only increased over the last 90 days," Mr. Shapiro said. "The value of the merger is that if any part of the capital markets is open and functioning, we have a better chance than most of taking advantage of the opportunity."

Optimism over the deal was overshadowed Thursday by the earnings warning. The companies were not specific on numbers, but analysts scrambled during the day to slash their estimates. The consensus for Chase had been 78 cents per share for the fourth quarter, according to Thomson Financial/First Call. For Morgan, the consensus before the warning was $2.62 a share.

Henry C. Dickson, an analyst at Lehman Brothers, lowered his estimate to 45 cents per share for the combined company, down from 70 cents. He calculates that trading revenues will be $300 million lower for the combined company and that Chase Capital Partners will record a $125 million loss for the period.

Expenses were the real issue, Mr. Dickson and other analysts said. Chase said it had to honor compensation guarantees it made to employees of Fleming and Hambrecht & Quist, two companies it has acquired over the course of the year. The higher compensation levels exacerbated the effect of slowing revenues in the investment bank, the company said.

Mr. Shapiro vowed that 2001 expenses would be flat year-over-year, assuming Fleming's contribution to this year's expenses was extrapolated for the full year. Chase closed its deal for the London-based asset management and investment banking boutique in August. "They have to demonstrate that they can get expenses under control," Mr. Dickson said.

Chase and Morgan have fallen prey to forces that are affecting many investment banks and brokerage firms. A sharp cutback in new debt and equity issuance, along with widening credit spreads, choked off profits. Chase said trading revenues at both firms would be down from last year's fourth quarter and from the third quarter this year. Donald H. Layton, vice chairman and head of global markets at Chase, added that the decline was not the result of any big loss; he said it was linked to lower volume.

At Chase Capital Partners, mark-to-market losses in the quarter thus far would be $300 million, and Chase said realized cash gains from the business are likely to be "significantly" lower than the third quarter. Chase struggled with venture capital in the third quarter as well. The performance of Chase Capital Partners was cited as the reason the company's earnings per share fell 25 cents short of estimates.

For Chase, the slowdown is not limited to investment banking. Mr. Shapiro said it was not clear whether the company's consumer operations would have as good a quarter as the third quarter because of a "challenging" environment for mortgage lending and higher marketing costs in credit cards. "We need to focus the consumer business," he said. "We hope to have a view on it that we can share with you at our January conference call."

The two companies have escaped the credit quality issues that are plaguing some of the largest U.S. banks, including Bank of America Corp. Mr. Shapiro said there would be no material change in Chase's nonperforming-asset levels but there would be an up-tick in commercial loan chargeoffs for the quarter.

The merger is to close Dec. 29, ahead of schedule. Merger charges are expected to be $3.2 billion before taxes, against the earlier estimate of $2.8 billion.

The fourth quarter will also include some gains, including $870 million pretax for the sale of Chase's Hong Kong operations and $400 million from Morgan upon the termination of its operating agreement with Euroclear.

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