Dimon: CA Can Cause Contagion; Europe will Weather; $200M in Spending to Improve Trading Software Technology; POTC Thinks Stricter Regs will be Boom for Financial Software Cos ...

By Matthias Rieker

DOW JONES NEWSWIRES
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NEW YORK (Dow Jones)--J.P. Morgan Chase & Co. (JPM) Chief Executive Jamie Dimon said he remained cautious about the economic outlook, and that a double dip in the economy is still possible.
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Dimon, speaking Thursday during the bank's annual investor day, also said that trading revenue from investment banking "so far have been good this quarter," but "we don't know" how J.P. Morgan will reserve for credit losses going forward. "We are cautious."
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He said risk from potential sovereign defaults is hedged. "Greece itself would not be an issue for this company, nor would any other country," Dimon said. "We don't really foresee the European Union coming apart."
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California, however, could be another story. Given the size of the state and its economy, "there could be contagion" if the state would run into problems in servicing its debt, he said.
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He reiterated that J.P. Morgan would not raise the dividend until they are sure the banking environment has improved, and that the company's preference is to expand rather than buying back stock, unless growth opportunities are rare and the stock cheap.
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J.P. Morgan Chase & Co. (JPM) Chief Financial Officer Michael Cavanagh told investors about half of the bank's current reserve for loan losses is excess when losses come down.
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Also on Thursday, the bank's investment banking chief, Jes Staley, said J.P. Morgan doesn't plan any strategic shifts despite a "dramatically" changing regulatory environment.
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"We have to be innovative" to keep the investment bank at the top of the league tables comparing companies, but "we need to adjust our business model for changes to come," Staley said.
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Dimon, speaking on potential new banking regulation, said that higher capital requirements for capital markets businesses would not be "life threatening." Dimon said that the discussion about regulation in Washington, at times, doesn't "sound completely rational" and sometimes "hurts your feelings." But, ultimately, "I do think we'll end up at a more rational space," he said.
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Staley told investors the bank wants to maintain pricing discipline even when the market recovery will lead to new excesses driven by more aggressive competitors. J.P. Morgan "has to have the discipline to give up market shares" through pricing discipline and careful risk management, Staley said.
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Staley said he aims for a return on equity of 17% for the investment banking business, down from 21% last year, and slightly below the 18% J.P. Morgan generated in 2006.
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Staley predicted a decline in capital markets activities. Last year a big part of J.P. Morgan's capital markets activity came from banks raising capital, and J.P. Morgan was a leader in that area. In addition, profit margins in the fixed income businesses are coming down, he said.
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He also said the bank aims to improve its trading technology, increasing its investment in new technology this year by $200 million, to a total of $1 billion, to build a "best-in-class" trading system.
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The investment banking chief said J.P. Morgan has "not much room to increase headcount" this year, so the division's main expense remains variable compensation.
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"We have to pay competitively," Staley said. "Last year we needed to reorganize the environment we were in. We needed to be mindful. I don't think we are out of the compensation issue as a political matter. Our people have to recognize that [compensation] is a variable number" that it is tied to the performance J.P. Morgan.
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"All of Wall Street" needs to continue to focus on the issue of compensation, he said.
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Meanwhile, J.P. Morgan Chase's head of asset management, Mary Erdoes, said the earnings of her division "should double in a very short time."
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Erdoes said the firm will continue to invest in technology and retail distribution of J.P. Morgan's mutual funds, and expects to grow faster abroad. Only one-third of the division's results come from abroad, and it should not be that way, she said.
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J.P. Morgan is also testing a new credit card product for high-net-worth individuals, she said.
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J.P. Morgan's chief executive of card services, Gordon Smith, said delinquencies have continued to improve. Improvements late last year were mainly in the decline in new delinquencies for customers who missed their first payment. However, in recent weeks the trend has been trickling down into those groups of customers who are 60 and 90 days late with their payments.
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However, the improvement is less pronounced as improvements in early delinquencies, Smith said. That is a material change, he said. J.P. Morgan is also seeing improvements in bankruptcies among card customers.
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"We are seeing that it is very difficult to get new jobs into the economy," Smith said. But customers with little debt have started spending more, particularly in markets where housing prices are falling less than during earlier parts of the crisis.
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-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com
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(END) Dow Jones Newswires
February 25, 2010 17:53 ET (22:53 GMT)
Copyright (c) 2010 Dow Jones & Company, Inc.- - 05 53 PM EST 02-25-10
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