James Dimon

The former president of Citigroup is reveling in his position at the helm of one of the country’s fastest-growing financial institutions, Bank One. And as Linda Corman discovers, James Dimon has earmarked the capital markets business as a driver of future profits and growth

With a balance sheet a fraction of the size of the largest US banks, Bank One may appear to be an unlikely candidate to be a top underwriter of bonds or provider of derivatives. But that is the bank’s goal and with former Citigroup president James Dimon leading the efforts – and a strong three and a half years’ worth of results at Bank One to substantiate his reputation – the bank is gaining credibility.

“Don’t be confused by the area code of our headquarters,” says Thomas Kelly, a spokesman for the bank. The bank’s headquarters are in Chicago while the other top banks are on either coast, far from the Midwest.

When Dimon was brought in as a successor to John B. McCoy in March 2000, the bank, the nation’s sixth largest with operations in 14 states, had just lost half a billion dollars, much of it due to bad commercial loans, and it was in danger of going into bankruptcy. Bank One was losing credit card customers in droves as it had botched the recent acquisition of First USA’s credit card business.

The bank’s retail operation was suffering from neglect and the entire firm was an inefficient amalgam of merged but still largely separate institutions. Bank One was still accommodating its most recent mergers, with Banc One, a largely retail institution based in Columbus, Ohio, and First Chicago NBD, with its traditional corporate focus. On top of that, within a year of Dimon’s arrival at the bank, it was fined $1.8 million by NASD Regulation for violations of federal securities laws in its capital markets area because of accounting irregularities.

Bouncing back

Since then, under Dimon’s legendary hard-driving but detail-oriented leadership, probably given an extra edge by a determination to prove himself after being sidelined by his former boss and mentor, Sanford ‘Sandy’ Weill at Citigroup, the bank has cut expenses by about 15%, reduced its loan exposure and raised loan loss reserves. It has also improved credit quality with write-offs down 50%, improved earnings to $3.3 billion in 2002, and overhauled management. It has focused intensively on its retail operations, improving service, unifying functions, and it has made progress in integrating the computer systems of the various institutions that have merged over the past few years to form Bank One.

In addition, Dimon has focused on, and gotten results in the capital markets area. The bank has risen in the Thomson Financial league tables from fifteenth in investment-grade underwritings in 2000 to tenth as of early December 2003. The bank had underwritten $17.6 billion of high-grade debt as of early December, up from a total of $10.8 billion for all of 2002.

Also between 2000 and 2003, the bank rose from twentieth to ninth in asset-backed securitization. By July of 2003, it had underwritten $16 billion of asset-backed securities, versus $17 billion for all of 2002. Within the asset-backed category, it has jumped from sixth in 2001 to second in the third-quarter results in credit cards, and from tenth to fifth in automobiles in the same period.

From the third quarter of 2002 to the third quarter of 2003 alone, capital markets revenues grew 52% from $154 million to $234 million, according to the bank.

In many ways, what Bank One has accomplished is no different from what many other banks nationwide have done, analysts say. In common with many banks, Bank One set out in 2000 to shift its reliance from lending to fee-based revenues, and it has been successful. While 35% of revenues came from non-lending sources in 2000, that has risen to 63% currently. A key part of that strategy was to generate fees from capital markets.

The objective set by Dimon was for the bank to move from being a strong co-manager to climbing into the top 10 in the league tables in four areas within three years, says Wendy Breuder, managing director and head of investment-grade securities at Bank One. These four areas are high-quality fixed income, loan syndication, asset-backed conduits and investment-grade securities, says Breuder.

In setting out to increase its fee income and build its capital markets area, the bank has sought to build on the corporate banking relationships already in place – the model employed by Bank of America and JPMorgan – rather than to build its capital markets business from a strong secondary trading operation, like UBS, says one portfolio manager. Step one was to strengthen the bank’s existing relationships and then to develop new relationships. As one of the top three corporate lenders nationwide to middle-market businesses, the bank has a strong foundation from which to work.

Bank One began by reviewing all its corporate relationships and assessing its mix of business between lending and fee-generating activities, says Breuder. The bank then decided which areas it needed to focus on to make its customers rely on it for capital-raising activities.

An important factor in this strategy was cutting down on lines of credit and steering customers toward more fee-generating activities, says Kelly. Within a year of Dimon’s arrival, the bank reduced its loan exposure to $50 billion from $90 billion.

Dimon played a key role in this, says Denis Laplante, head of US bank research at New York-based investment bank and broker, Keefe, Bruyette & Woods. “Dimon has brought discipline in not just relying on credit but looking for the cross sell, saying if we don’t get it we’re going to reduce our exposure to your company,” says Laplante.

“He’s spent the past three years managing exposures down,” he adds. “It’s not that he’s doing something new. But 10 years ago, the former management said it was trying to do it, but it couldn’t. So, it’s significant.”

Like other major commercial banks, Bank One is also aiming to grab market share from investment banks by offering discounts on capital markets products, says Richard Bove, managing director of investment bank and broker, Hoefer & Arnett. Bank One and others are able to offer significant discounts because they also have the corporate lending business, adds Bove.

To strengthen its capital markets area, Bank One hired some 200 people overall, including 36 in Breuder’s area alone, up from three. Virtually all the bank’s new hiring in the past few years has been in capital markets, says Laplante. The new hires have also included nine people for the secondary trading operations, up from two in 2000, and the company plans to add two more in 2004. Bank One has also invested $110 million in building a new trading floor, to be ready early in 2004, a development that will nearly double the company’s existing trading space.

“Secondary trading is imperative for dealing with the investor base, to build their confidence,” said James Gallagher, head of fixed-income trading for Bank One in a recent interview with Investment Dealers’ Digest. “If you don’t provide liquidity on the back end, you’re ultimately going to lose out.”

In hiring, Bank One has taken advantage of the stock market plunge and the subsequent shrinking of capital markets operations in most institutions, says Breuder. Would-be employees were also reassured by Dimon’s commitment to building the bank’s capital markets operations over the long term.

“It helped us recruit,” says Kelly. “People would ask, ‘Are you serious?’ and we could say, ‘We’re serious all the way to the top.’”

A capital start

Dimon’s background is in capital markets: he was chairman and CEO of Smith Barney and subsequently co-chair and co-CEO of the combined Salomon Brothers Smith Barney before moving up the ladder at Citigroup.

While investing in capital markets has been the core of Bank One’s strategy, deciding not to invest in other areas has also been key to the results it has achieved.

“There was a decision to reshape the business so it was no longer everything to everyone,” says Bove. The bank decided instead to focus on areas where it had a natural advantage, such as in asset-backed securities, a natural for Bank One since middle-market corporations are a traditional strength of Bank One’s and tend to be the largest issuers of asset-backed securities.

Breuder says: “We’re not an M&A advisory firm. That is not a strength of ours in the large corporate arena. We are also not a strong force in equity research.”

Most observers would admit that little if anything of what Dimon has achieved is unique, but what has made his accomplishments at Bank One notable is the combination of challenges he has faced and their successful execution. Dimon himself is more interested in the practicalities of execution than in the theory of tactics. “I’d rather have a first-rate execution and second-rate strategy anytime than a brilliant idea and mediocre management,” Dimon has told Fortune magazine.

Having achieved the goal of rising to the top 10 in the league tables, the bank now has a new aspiration: being ranked among the top five commercial banks in any fixed-income categories in which the bank has not yet achieved that level, says Breuder.

Some analysts believe the goal could well be within Bank One’s grasp. To Hoefer & Arnett’s Bove, the bank’s strategy of building gradually, area by area, thereby generating the resources to invest in new areas is a powerful one.

But other analysts, including Laplante of Keefe, Bruyette & Woods, doubt Bank One will be able to compete with the top-tier banks unless it makes a “significant” acquisition. Without such an acquisition, says Brock Vandervliet, an analyst with Lehman Brothers, it will be tough to make capital markets a significant part of the bank’s operations.

Having been key to Citigroup’s successful strategy of growth through acquisition, Dimon clearly has a penchant for M&A. Together with Sandy Weill at Citigroup, Dimon masterminded the takeover of Commercial Credit, Primerica (owners of Smith Barney), Shearson, and Travelers in the early 1990s. The group took the Travelers name, before buying the property and casualty business of Aetna, followed by the purchase of Salomon Brothers. In 1998, Travelers bought Citicorp and Citigroup was formed.

Despite Dimon’s acquisitive streak, now may not be the best time for Bank One to buy a brokerage company, says Laplante. This is because stocks of many brokerage companies are riding high.

But Breuder maintains the bank can achieve its goals without an acquisition. The chief obstacle, she believes, is in the bank expanding its reach globally. The institution has traditionally been a domestic player but as markets become ever more international, the bank will have to follow suit. The size of the bank’s balance sheet compared with the top commercial bank competitors will also be a challenge, says Breuder. But here too the bank is prepared to expand if necessary.

Despite the measurable progress Bank One has made, there are still skeptics. “They’re considered by us as more of a regional dealer,” says one large fund manager. “They’ve had some success in asset-backed securities but on the corporate side, they’re not a major player. They’re definitely not Bank of America or Morgan Stanley.”

Dimon is intent on changing that.