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For JPMorgan, More Deals Possible In The US, Abroad

Sep 29, 2008 Market Outlook, U.S Hot Stocks

NEW YORK (Dow Jones)–With its U.S. branch network and retail banking business
greatly expanded, JPMorgan Chase & Co.’s (JPM) future focus might turn abroad.

JPMorgan Chairman and Chief Executive James Dimon stopped well short of declaring
the company’s retail banking expansion in the U.S. complete after the acquisition
of the banking operations of Washington Mutual Inc. (WM) late Thursday.

But he also reiterated his long-held desire to add capacity abroad. “We do a lot
of business abroad, so we have ambitions there, too,” Dimon said Friday during a
conference call with reporters.

JPMorgan Chase shares recently traded up almost 3% to $46.40.

The main difference between rivals JPMorgan Chase and Citigroup Inc. (C) has long
been the extent of their overseas operations and the degree to which they have
diversified their revenue abroad. Like Citi, JPMorgan Chase has expanded in
China, and Dimon has expressed his desire to match Citi’s sizable operations in
Japan. Dimon has often said that expanding consumer operations beyond the U.S. is
on his to-do list.

But he, and many other JPMorgan Chase insiders, have said the company would be
cautious in pursuing consumer deals abroad, and that filling the bank’s retail
and consumer banking businesses at home held a higher priority. That’s the
opposite consumer strategy from Citi, which has been lukewarm about expanding the
U.S. consumer and retail banking business.

JPMorgan retail chief Charles Scharf told reporters during a conference call
Friday that, before JPMorgan acquired most of WaMu’s operations, the thrift had
been “on the top of the list” as a way for JPMorgan Chase to expand its retail
banking business. For the next couple of years, focusing on the domestic business
might keep Dimon and Scharf busy.

The integration of Washington Mutual will take time, if only because integrating
a thrift into a bank has always been more difficult than bank-to-bank deals.
Thrifts are less familiar with bankers’ strategy to sell more products to the
same customers, a tight focus of Scharf and Dimon.

And even when the integration is complete, JPMorgan Chase is very likely to work
on grabbing more market share in California and Florida, its new banking markets,
before turning its focus abroad, said Frank Barkocy, director of research at
Mendon Capital Advisors Corp.

With the WaMu deal, JPMorgan Chase’s deposit market share in California and
Florida is 12.2% and 3.9%, respectively, and JPMorgan Chase has shown that it
likes to acquire share even in markets where it is already dominant. In 2006, it
bought the retail banking operations of what is now Bank of New York Mellon Corp.
(BK).

The combined company has no presence in most of the Great Plains and adjoining
states such as Minnesota and Montana. Dimon might skip those areas, Barkocy said.

Asked during the conference call whether he believes JPMorgan Chase is finished
expanding through acquisition in the U.S., Dimon quipped: “I was thinking of
retiring tomorrow.”

He was quick to add: “This is still a big country and there are a lot of places
we are not in. We can grow” organically or “might acquire in the United States,”
Dimon said.

However, there might be an impediment: the national deposit market-share cap that
restrict banks from acquiring more than 10% of national deposits. The WaMu deal
would push JPMorgan Chase “slightly” above that cap, Scharf said. Analyst David
Hendler of CreditSitghts Inc. calculated the combined company’s deposit market
share as 10.5%, a whisker short of Bank of America Corp.’s (BAC) 10.8%.

Thrift deposits don’t count in the 10% limit - only bank deposits - which allowed
Bank of America to buy Countrywide Financial Corp. But Scharf said the WaMu
deposits will count towards the cap “in the next transaction.” Like Bank of
America, JPMorgan Chase could get around it if deposits run off in the meantime.

Another U.S. consumer business Dimon might expand is subprime credit-card
lending. JPMorgan Chase’s own portfolio was high quality, but with WaMu came the
portfolio the thrift acquired years ago with Providian Financial Corp.

Subprime credit-card lending, “if it’s done well and done right, is O.K.,” Dimon
said. “Providian has a lot of very good stuff,” though JPMorgan Chase might not
continue all of the card lender’s strategies, he said.

Scharf said he isn’t thinking of divesting any of the businesses JPMorgan Chase
bought with the two WaMu thrift subsidiaries, but reiterated that the combined
company will consolidate branches - during the conference call Thursday he put
the number of branches closed at between 400 and 500. Those closures could come
both from WaMu and JPMorgan Chase branches in market were there is much overlap -
in, for example, Illinois, Texas, Colorado, and New York.

Asked how many job losses might result, Scharf said he doesn’t have a number yet,
but said that particularly the branch staff might find work at other JPMorgan
Chase branches. The company is hiring, he said.

But many observes said that, eventually, JPMorgan Chase will turn its focus
abroad. “Theoretically, [WaMu] should be everything Jamie wants,” said Nancy
Bush, who runs her own research firm, NAB Research LLC. As Barkocy indicated, she
said, Thursday’s deal will keep JPMorgan busy for years. Even in its existing
business, Dimon sill has to deal with “the hurricane on Wall Street,” Bush said.
“But when we have our financial act together, they’ll look abroad,” she said.

Dimon said, “The dollar is weaker,” which makes it harder to buy right now, and
“there are very important things to finish here.” Still, “The priorities will
change over time, but they are not predetermined” to shift from the U.S. to
overseas automatically because JPMorgan Chase feels it is done building here, he
said.

Robert I. Lipp, who for years advised Dimon on JPMorgan Chase’s plans to expand
the consumer business internationally, said in a recent interview that the
company has “a great desire, a real interest from a strategic point of view” to
expand abroad. Lipp left JPMorgan Chase last month to join private-equity firm
Brysam Global Partners.

JPMorgan Chase has considerable wholesale banking operations abroad, particularly
capital markets and treasury and securities services businesses. But during
JPMorgan Chase’s analyst day earlier this year, Dimon said the lack of
international consumer operations “is probably our biggest, and I would say only,
strategic conundrum.”

“It’s very complicated,” he said. “If we can do smart things, we’re going to do
them. We don’t want to leave my successor a hodgepodge of crap, just to say ‘we
did it.’ I think over the next five years we will hopefully find and execute some
really neat” deals.

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Technorati Tags: Bank Deals, Banking Operations, Charles Scharf, Chase Co, Chief Charles, Citigroup Inc, Consumer Banking, Consumer Deals, Consumer Operations, Consumer Strategy, Domestic Business, Dow Jones, James Dimon, Jpmorgan Chase, Overseas Operations, Retail Banking, Thrifts, Wamu, Washington Mutual, Washington Mutual Inc

Tags: Bank Deals, Banking Operations, Charles Scharf, Chase Co, Chief Charles, Citigroup Inc, Consumer Banking, Consumer Deals, Consumer Operations, Consumer Strategy, Domestic Business, Dow Jones, James Dimon, Jpmorgan Chase, Overseas Operations, Retail Banking, Thrifts, Wamu, Washington Mutual, Washington Mutual Inc