James Dimon has long seemed destined to be the chief executive of a huge Wall Street bank. The day of his ascension has now been set.
J. P. Morgan Chase announced yesterday that Mr. Dimon, 49, would succeed William B. Harrison Jr., 61, as chief executive at the end of this year, six months earlier than originally planned.
While the new title will provide a symbolic boost to Mr. Dimon's profile, it will also increase the pressure on him to produce results. Almost two years after its $58 billion merger with Bank One, J. P. Morgan has a stock that still hovers close to its yearly low, hamstrung by inconsistent results from its investment bank and a waning appetite on the part of investors for ungainly financial giants.
With a cost-cutting process nearing completion, Mr. Dimon, a famously impatient executive, is likely to find the lure of a transformational deal all the more compelling. But the company's stock price, as well as the steep valuations of target banks and brokers, will make any kind of flashy merger hard to pull off.
The decision to speed up the handover, however, was not driven by any such challenges but came about after Mr. Harrison and the board recognized that giving Mr. Dimon the top job would formally acknowledge what has been Wall Street's worst-kept secret for many months: that Mr. Dimon is already running the show. Yesterday, J. P. Morgan shares rose 2.8 percent.
The transition plans were set about three months ago, when Mr. Dimon and Mr. Harrison had dinner at the Four Seasons, and Mr. Harrison broached the thorny subject of succession. Nearly two years ago, the issue almost derailed merger talks between J. P. Morgan and Mr. Dimon's Bank One, until Mr. Dimon relented and agreed to let Mr. Harrison remain as chief executive until the middle of next year.
This time, the tenor was much different as the two men, with their legacies dependent on each other, have grown somewhat close. "He said, 'You know what, I think things are going so well that the right time would be now,' " Mr. Dimon yesterday recalled Mr. Harrison saying that night.
Mr. Harrison is now expected to stay on as chairman for a least a year, if not two.
Yet with the mantle of chief executive soon to fall on his shoulders, the day has arrived for Mr. Dimon to live up to a reputation of Wall Street brilliance that was forged more than a decade ago at Citigroup, where he was Sanford I. Weill's right-hand man. After being ousted from Citigroup after a succession struggle in 1998, Mr. Dimon made his comeback as chief executive of Bank One.
But being top banker in Chicago, where Bank One was based, is far from being the top banker on Wall Street. Being president is not the same as being the chief.
"Obviously, there is a difference in being the C.E.O. or not being the C.E.O.," Mr. Dimon, a native of Queens, acknowledged in an interview yesterday. "You are either flying the plane or you're not."
J. P. Morgan yesterday reported a 78 percent jump in earnings for the third quarter, but the results also underscored the challenges for the bank's businesses. The strong earnings growth was driven by unusually huge gains in trading and investment banking. Still, earnings at its retail business fell 20 percent, and the bank will need to make heavy investments to revitalize its retail branches and upgrade its complex back-office computer systems.
In addition, Morgan, like other banks, faces the headwinds of rising interest rates, putting pressure on its lending profit margins. Analysts say there are signs that its large credit card division and mortgage business, long powerful growth engines, are also starting to suffer. And the cost-cutting and integration efforts between Bank One and J. P. Morgan Chase - which executives say are on schedule - are still not complete.
"When you are investing in J. P. Morgan," said Brad Hintz, a research analyst with Sanford C. Bernstein, "you are betting that Jamie's team of expense-control czars are going to be able to fully integrate this business." Although Mr. Dimon had success in turning around Bank One, some suspect J. P. Morgan represents a far more difficult task.
"It took three years for him to reconcile Bank One's issues," said Meredith A. Whitney, a banking analyst with CIBC World Markets in New York. "J. P. Morgan is a far more complex animal, and you are in a more challenging operating environment."
Shares of J. P. Morgan are down 11 percent since the Bank One merger was announced in January 2004.
And the third-quarter numbers were strong over all. J. P. Morgan earned $2.5 billion, or 71 cents a share, from $1.42 billion, or 39 cents a share, in the quarter a year earlier. Revenue rose 16 percent, to $14.5 billion.
The most recent results included $221 million, amounting to roughly 4 cents a share, in pretax expenses related to its merger with Bank One in 2004. Morgan estimated losses of about $400 million related to Hurricane Katrina in large part because of its significant concentration of retail branches on the Gulf Coast. It took a $248 million charge for the quarter, or 7 cents a share.
"The merger of J. P. Morgan and Bank One has gone extremely well," Mr. Harrison told investors during a conference call yesterday. "We've accomplished many of our milestones, and I felt the time was right to turn the company over to Jamie."
Morgan's investment banking unit, after sputtering during the second-quarter, was the company's profit engine in the third quarter. It posted earnings of nearly $1.1 billion on record revenue, up 70 percent from a year ago, on strong performance from its trading group, its fixed income division and its energy desk.
On the commercial banking side, there was some evidence of Mr. Dimon's cost-cutting measures in the corporate lending and real estate units, each of which, analysts said, had lowered compensation ratios.
Its credit card division also showed significant improvement with earnings of $541 million, up 29 percent year over year. Revenue was up 6 percent on higher spending volumes and loan balances, but the company estimates that the cost of writing off credit card debt will total more than $500 million through the end of the year.
Morgan's retail banking operations, like those of many of the big banks that posted earnings this week, have been hurt by higher interest rates and tough competition that squeezed profit margins. Its third-quarter earnings were $656 million, a 20 percent drop from the period last year.
Bank of America, the nation's second-largest bank with large consumer operations, also reported third-quarter profit yesterday. Net income rose to $4.13 billion, or $1.02 a share. That was up 10 percent from the period last year on double-digit revenue growth across the board.
Bank of America said that its $35 billion merger with MBNA to overtake Citigroup as the country's largest credit card issuer was on track, to be completed by early January 2006. (MBNA, in its third-quarter earnings released yesterday, said that net income fell 1.4 percent, to $717.9 million, or 56 cents a share.)
Bank of America "can't get away from spread compression; that's just a fact," said Ms. Whitney, the CIBC banking analyst. "What will continue to drive B of A's higher is that they don't have the expense or operating issues that Citigroup has or at J. P. Morgan Chase."
Indeed, those issues are what Mr. Dimon must contend with as he eases into his new role as chief executive. But this time around, a deal may not be the solution, at least in the near term.
Mr. Dimon said yesterday that media speculation about J. P. Morgan looking at another transformational deal was "blown out of proportion."
In the conference call, while noting that "there will be options down the road," he said that the bank was not yet capable of executing a deal. Management, he suggested, was still focused on integrating the computer system and Bank One, among other things. Still, Mr. Dimon did not rule out the possibility.
"The army will be capable to do other stuff sometime next year, which is reasonable," he said. "Doesn't mean we will."