Consumer credit concerns weigh on JPMorgan

By Elinor Comlay - Analysis

NEW YORK (Reuters) - Wall Street's love affair with JPMorgan Chase & Co (JPM.N) Chief Executive Jamie Dimon may soon end.

Investors are growing concerned that a possible U.S. recession, coupled with the bank's sizable consumer credit business, could make Dimon -- who has been lionized for largely sidestepping the subprime lending crisis that laid low many competitors -- look much less impressive.

The bank's reputation for making savvy acquisitions is also under question, as doubts about the wisdom of the Bear Stearns Cos takeover mix with concern that JPMorgan might try to buy a large regional bank or thrift.

"It's surprising that the sheen has stayed so untarnished," James Ellman, a portfolio manager at hedge fund Seacliff Capital in San Francisco, said commenting on Dimon's reputation.

Dimon, who has led JPMorgan since the end of 2005, has been credited with the bank's success. Once passed over for the No. 1 job at Citigroup, the former protege of Sandy Weill has been hailed for his ability to contain costs and integrate the diverse banks which combined to comprise today's JPMorgan.

But Michael Nix, a portfolio manager at Greenwood Capital Associates, said his firm, which manages more than $700 million across asset classes, has pared its holding over the last year to about 1 percent of the portfolio from about 3.5 percent.

JPMorgan has been a safe haven for many investors in financial stocks. Its shares are down about 12 percent on the year, placing it among the top performers of the KBW index, down around 27 percent over the year.

But Nix believes that when conditions improve, investors are likely to move away from broad, diversified financial companies that are seen as stable, such as JPMorgan, and return to other financial firms with more attractive valuations. He said Greenwood Capital is looking at Morgan Stanley and Goldman Sachs, as well as some of the exchanges.

JPMorgan is trading at 13 times estimated 2009 earnings, compared with 7.8 times for Morgan Stanley and 11 times for Goldman Sachs, according to Reuters data.

A JPMorgan spokesman did not return calls.

DEATH OF 1,000 CUTS

Ellman highlighted JPMorgan's consumer credit exposure as a serious threat to profitability. He said, "Consumer finance is a major, major problem potentially for JPMorgan."

JPMorgan is among the biggest U.S. credit card issuers and it also has growing auto loans and mortgage businesses. For the first quarter of the year, JPMorgan recorded $1.8 billion in income from credit cards and auto loan originations of $7.2 billion and mortgage loan originations of $47.1 billion, up 38 percent and 30 percent respectively on the same quarter the year before.

But at a May conference, Dimon revised downward estimates across its consumer businesses. Loss-rates on credit cards are expected to climb, while home equity losses, projected to be $500 million this quarter, could rise to $900 million by the end of the year.

"What we're seeing is fairly constant deterioration in both consumer and small business credit," said Dimon at the conference.