Our CEO of the Year
Jamie Dimon managed a remarkable reversal of fortune at Bank One.
Morningstar's 2002 CEO of the Year proves you don't need a grand strategy to run a great business--you just need to get the basics right. Since his arrival at Bank One (ONE) in March 2000, Jamie Dimon has transformed what was arguably the worst-run big bank in the country into a solidly profitable firm with a bright future, and he's done it without tearing the bank away from its middle-market, Midwestern roots. In doing so, he's made difficult decisions, displayed independent thinking, and greatly enhanced shareholder value--all of the qualities that we look for in a CEO of the Year.
What a Mess
It's tough to overstate just how bad things were at Bank One when Dimon was appointed to run the show. Its First USA credit card unit--at the time, the nation's third-largest credit card issuer--was an unmitigated disaster with a bloated cost structure, poor returns, and attrition rates double the industry norms. (At the time, almost 20% of First USA's customers canceled their cards each year.)
On the banking side of the business, the firm had never really streamlined after the numerous mergers that had built Bank One into one of the nation's largest banks. Bank One had 20 bank charters and several different computer systems, and each bank was run as a little regional fiefdom. So, the company hadn't saved any money on systems integration, and Bank One customers who moved from one state to another often faced nightmarish troubles when they tried to move their accounts to a new branch.
Finally, Bank One simply wasn't running large parts of the firm profitably. It was making the worst mistake any financial-services firm can make by not getting paid enough for the risk it was taking on. Bank One made too many unprofitable corporate loans without getting the higher-margin fee business from customers in return. Corporate customers who just borrowed money but didn't use any of Bank One's other services--such as cash management, bond underwriting, or derivatives--were money-losers for the firm, and there were plenty of them. Bank One was also making unprofitable car leases and brokering home equity loans, both of which were growing quickly but neither of which were very profitable.
Dimon's first step was tackling the two biggest operational problems: First USA and Bank One's excessive head counts. He fired close to 10% of the firm's workforce and eliminated a total of about $1.8 billion in operating costs, while increasing customer satisfaction at the same time. A lot of those cuts came from First USA, and now the credit card company has one of the lowest cost structures in the industry. For the first nine months of 2002, First USA's net margin was almost 24%, far exceeding the 16% margin posted by Citigroup (C) and MBNA (KRB).
The next item of business was to stop making unprofitable loans. Corporate customers who were buying only one service--cheap loans--were given an ultimatum: Either throw us some of your fee business, such as cash management or asset management, or take a hike. Although Bank One's corporate division isn't yet a standout, it has maintained reasonable high-single-digit returns on equity through the recession thanks to trimming its loan book. On the consumer front, Bank One stopped doing brokered home equity loans--where default rates were quite high--and the firm also pulled out of the money-losing auto lease business. Dimon has also focused the bank's managers on profitability rather than growth for its own sake by creating branch-level profit-and-loss statements--so branch managers know exactly how they stack up against their peers.
Finally, Dimon and his team have built what he calls a "fortress balance sheet" that has put Bank One on firm-enough footing that it has started beating the bushes for acquisitions on the cheap. Bank One's tier one capital ratio--a measure of core equity capital--is the highest among the nation's top 10 banks at 9.5%. Bank One also has the highest level of loan-loss reserves (3%) relative to other big banks. Dimon has achieved this financial strength by making tough decisions--such as raising loan-loss reserves and slashing the dividend--that may hurt results today, but which should pay off in spades in the future. Since Bank One has provisioned heavily during the past couple of years, the firm's returns were generated with much higher quality earnings than its chief peer group, although they were lower on an absolute basis.
Bank One has also recently completed a computer systems integration so it can offer uniform loan pricing and service across all of its bank branches. By consolidating all the bank charters and truly becoming "Bank One," the firm will save about $200 million in operating costs and should be able to offer customers much better service.
Dimon's job isn't done yet. Although he's shored up Bank One's foundation, he needs to get the bank moving forward again. First USA recently started its first national advertising campaign in years, and Bank One has also started focusing on building new branches, after spending the past couple of years closing down unprofitable locations. Growth through acquisition is almost certain, although it's unclear whether the target will be a beaten-down diversified firm such as Prudential (PRU) or whether Dimon and his team will simply seek to expand Bank One's retail franchise by buying a smaller regional bank.
What matters, though, is that Bank One now has the financial strength to be a potential acquirer, a far cry from two years ago when the firm's survival was an open question. By focusing on basic business principles--keeping costs low, serving customers well, and focusing on profitability rather than growth at any cost--Dimon has turned Bank One around and earned our 2002 CEO of the Year award.
Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.