It’s Dimon’s world

JPMorgan Chase & Co. dominates New York like no other bank dominates a U.S. city.

It is the city’s largest private-sector employer. It is the biggest bank lender to small businesses.

And it is home to no less than 33% of New Yorkers’ total savings, far ahead of second-place Bank of America Corp., which holds 9% of retail deposits, according to the Federal Deposit Insurance Corp.

JPMorgan drives much of Wall Street, too. It generated more fees from investment banking than any other bank last quarter, more than The Goldman Sachs Group Inc. and 50% more than Citigroup Inc. or Credit Suisse Group AG, according to Thomson Reuters.

It is also a giant corporate lender, as evidenced last quarter when the bank extended a $20 billion loan to finance AT&T’s proposed acquisition of T-Mobile USA Inc.

“Any way you look at it, they rule the New York market,” analyst Patrick Sims of bank research firm SNL Financial LC said of JPMorgan.

That mightiness in large part is a testimony to chief executive Jamie Dimon’s skill as a manager and his ability to steer the megabank clear, at least so far, of the disasters that befell rivals. The U.S. government also has played a major role, allowing JPMorgan to solidify its grip on the banking world by acquiring The Bear Stearns Cos. Inc. and Washington Mutual Inc. at fire sale prices as the financial crisis raged in 2008.

Such dominance, however, also presents significant challenges.

So far, Mr. Dimon has been running something of a Teflon bank, winning over shareholders and watching key customer satisfaction ratings rise even as JPMorgan struggles with some of the same mortgage messes in which its rivals are stuck.

But his bank’s sheer size makes it a natural target of greater government scrutiny. The Securities and Exchange Commission, for instance, appears close to filing charges related to a soured mortgage investment marketed by JPMorgan that closely resembled the one that famously forced Goldman to pay a $550 million settlement last year.

Most important, Mr. Dimon must also figure out how to keep JPMorgan growing, especially with further big-bank acquisitions unlikely to pass muster with regulators.

LOAN VOLUME FALLING

With assets of $2.2 trillion, JPMorgan plays a pivotal role in the nation’s economy — a role that he is proud to emphasize. In last quarter’s earnings release, Mr. Dimon noted that JPMorgan provided credit and raised capital of more than $450 billion, including awarding mortgages to 180,000 people, credit cards to 2.6 million customers, and small-business loans or credit increases to 7,500 entrepreneurs.

“In every way we can,we continue the economic recovery in the U.S. and around the world,” he said.

What Mr. Dimon didn’t mention, which could be ascertained only by digging into a 47-page package of financial data accompanying the release, is that JPMorgan’s loan book is shrinking. Although “wholesale” loans — those to businesses — rose 10% from the year-earlier quarter, overall loan volume fell by 4% because the bank is lending less to consumers.

Mr. Dimon said at the annual stockholders’ meeting last month that the economy may be at “the beginning of a self-sustaining recovery.” That is cheerier than he was a year ago, when he worried out loud: “We don’t know when the recovery is.”

But the hard reality is that it will take years for Mr. Dimon’s massive retail-financial-services division to recover from its mortgage-related hangover.

This division, which generates about half the banking conglomerate’s revenue, posted a $208 million loss last quarter, in part because of high costs related to the 10,000 lawsuits that JPMorgan faces, mostly over problem mortgages. Last year, the bank’s litigation expenses hit a towering $7.4 billion, the equivalent of 43% of its net income.

Management also has been caught off guard by how far the housing market has fallen. Net charge-offs in the bank’s prime-mortgage portfolio — home loans to its most creditworthy customers — came in 16 times higher last quarter than the company expected.

As a whole, JPMorgan’s retail division “lags behind its target considerably,” Sanford C. Bernstein & Co. Inc. analyst John McDonald emphasized in a recent report.

The bank’s consumer problems won’t go away soon, according to the bank’s own bleak forecasts. Nearly half the retail division’s $321 billion in loans are expected to be charged off or not replaced as they mature with new ones of the same type.

That suggests a $700 million drag on net interest income annually.

Certainly, with housing markets so weak, it makes perfect sense for a banker to cut back on mortgage lending. But doing so throws a monkey wrench into Mr. Dimon’s entire retail-banking operation, leading analysts said, because home loans traditionally bring more new customers through the door than any other service offered by banks.

Mortgage customers, in turn, are potential new clients for credit cards, financial planning and other lucrative offerings by big banks.

“If you’re getting rid of mortgages because the housing market is in trouble, are you also getting rid of customers?” asked bank industry analyst Richard Bové of Rochdale Securities LLC. “That’s a big issue for JPMorgan.”

In the past, Mr. Dimon could deal with a shrinking client base simply by buying another bank and embracing its customers. But JPMorgan is now so huge — it has nearly 10% of all deposits in the United States — that regulators would need to waive rules governing bank competition before letting it acquire another bank of any significance.

BID FOR THE WEALTHY

As a fallback, the bank is focusing on international growth and adding dozens of branches in certain markets, including California and Florida.

Such expansion isn’t a real option anymore in New York, due to the bank’s mergers over the years with former giants Chemical Bank, Manufacturers Hanover Corp., WaMu and others. In the five boroughs alone, JPMorgan has 350 branches and 1,800 ATMs, and its vaults hold about $300 billion in New Yorkers’ savings.

Analysts said that regulators frown when banks hold 35% of a single market’s deposits, a level that JPMorgan is already approaching in the Big Apple.

To offset the decline in consumer lending, Mr. Dimon’s grand plan is to pamper wealthier customers in the hope that they will bring his bank more business. And the first fruits of this effort can be found in the Park Avenue branch 39 floors beneath his executive offices at JPMorgan’s global headquarters in New York.

There, the bank is developing Chase Private Client.

The service, which is about to be expanded locally and introduced in California and Florida, offers deluxe treatment to customers with at least $500,000 in liquid assets. That includes meeting an adviser who will pitch investment ideas from a private office at a local branch and give more customers the chance to do business with the upmarket JPMorgan-branded part of the banking company, rather than the more pedestrian Chase brand.

Executives think that the private-client business could generate up to $1 billion in net income annually.

“We think the right way to deepen relationships with customers is to offer them special attention,” said Andrea Kanter, head of investment products for Chase Private Client.

“Special attention” is a riff on an idea that many U.S. banks have tried for years — cross-selling financial services and products to existing customers. Indeed, such sales were the rationale for creating the banking behemoth known as Citigroup 13 years ago, an institution that Mr. Dimon was instrumental in shaping before he headed to a predecessor of JPMorgan.

Cross-selling can be tough — Citigroup was a notable failure at it — but working in JPMorgan’s favor is its unusually loyal customer base. It is the only major bank whose customer loyalty ranking has risen in the past year, according to consultancy Brand Keys Inc.; it now ranks behind only Wells Fargo & Co.

“A lot of names in banking have been hurt, but JPMorgan is one that is still good,” said banking analyst Nancy Bush of NAB Research LLC.

Countering that, many of these loyal customers aren’t terribly enthusiastic about the investment picks that their bank has peddled to them, a problem shared by many big institutions, including Citigroup and BofA.

The most recent J.D. Power and Associates survey ranked JPMorgan almost exactly average in customer satisfaction for the mid-Atlantic market.

More worrying, its in-house brokerage arm, Chase Investment Services Corp., ranked dead last. JPMorgan officials said that their internal research shows that customers are happy with the new private-client service, which is different from the brokerage offering measured by J.D. Power.

“Chase has work to do,” said David Lo, director of investment services at J.D. Power. “You can have all the innovative products you want, but people will consider them far more if they’re already happy with what they have.”

Aaron Elstein is a senior reporter at sister publication Crain’s New York Business.

Related Topics: Banking, Health Savings Accounts, Wealth Management