'Relationship' banking still struggle for Morgan

September 25, 1994|By Bloomberg Business News

NEW YORK -- Executives at J. P. Morgan & Co. thought they'd found a sure-fire strategy. Capitalize on the 156-year-old bank's web of ties to top corporate clients by selling them a batch of new services.

But Morgan has yet to prove it can make it work.

That's the principal challenge facing Douglas A. Warner III, Morgan's 48-year-old president who takes over as chairman Jan. 1 when Sir Dennis Weatherstone retires.

Morgan executives freely admit they still have a long way to go. Fully two-thirds of the bank's clients use only one or two of its 16 product lines. The company hopes to raise that to three or four.

There's more than pride at stake. Morgan "has substantially under-performed the bank market," said Claire M. Percarpio, a Duff & Phelps Investment Research Co. analyst who recently recommended clients sell the stock. Net income fell to $695 million in the first six months of the year from $726 million a year ago, as trading income plunged 40 percent.

That kind of result clipped Morgan shares 20 percent in the past year. Although the bank's earnings have risen steadily since 1988, its shares are up only about 60 percent. By contrast, shares of Bankers Trust New York Corp., which follows a similar strategy, are up roughly 100 percent.

No matter how much Morgan executives extol the virtues of "relationship banking," investors still see little proof in its financial results.

Persuading clients to use a wider range of the bank's products is the best way to give its share price a boost, executives say. "If we do that, the stock price will work out just fine," said Mr. Warner.

To that end, the nation's fifth-biggest bank will invest more in computer systems to scan clients' books, figuring out holes the bank can fill with products the client isn't now using. It also will expand its training programs to teach bankers how to pitch Morgan's range of services.

The bank has already used training to good effect. Over the past two years, Morgan held hundreds of seminars for employees on how clients can use derivatives. That helped the bank maintain its place as one of the world's largest sellers of these lucrative contracts in the face of a competitive onslaught from such securities firms as Merrill Lynch & Co. and Lehman Brothers Inc.

Morgan now gets most of its revenue from businesses it wasn't involved in six years ago. Lending and managing money account for a third of earnings, down from half six years ago. The bank's 47-floor, neo-Gothic headquarters has four trading floors, compared to one in 1989, and Morgan is the ninth-largest underwriter of U.S. corporate debt.

That growth in trading flowed directly from Morgan's banking ties, which augurs well for Mr. Warner's chances of finally delivering on its promise of being a one-stop financial services vendor to its old-line corporate clientele, investors said.

"They had a track record in wholesale banking, did their clients well, and used that as a springboard to do underwriting business," said Joe McLaughlin, a portfolio manager at Rittenhouse Financial Services in Radnor, Pa., which owns 2.2 million Morgan shares.

There's no doubt the bank inspires loyalty in many of its customers. "You don't feel they're trying to sell you something," said Lloyd B. Swaim, treasurer of Gillette Co.

Earlier this year, just as Gillette was about to sign up for a $500 million revolving line of credit, Morgan offered to cut its fees. Prices had fallen, the bank said, and a fee reduction was in order even though Mr. Swaim was ready to pay the agreed price.

That kind of service has even its competitors singing Morgan's praises.

"Morgan has done a wonderful job of taking its strong relationships, its solid commercial lending base, and evolving that into what is now one of the most powerful securities houses in the United States," said John Rolls, chief executive of Deutsche Bank North America.

Morgan is heading into another burgeoning market, aiming to turn commercial loans into securities. Less than two years ago, Peter Woicke, its capital markets head, gave the go-ahead for a small team of traders to start packaging commercial mortgages into securities to sell to investors, just like the $1.3 trillion market in securities made up of home mortgages.

The group has now grown to number about a dozen and is expected to turn a profit within a few months.

"That's a little bit how we built our whole securities business," said Mr. Woicke.

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