Credit analyst warns to not sell JPMorgan in a panic in market chaos

By Ronda Fears

Nashville, Tenn., July 25 - Amid the chaos and controversy surrounding JPMorgan Chase's involvement with Enron Corp. and its collapse, Kathy Shanley, senior bond analyst at Gimme Credit, said to avoid panic selling of the paper.

"From the way the stock prices of JPMorgan Chase (Aa3/AA-) and Citigroup have plummeted, at least until [Tuesday's] wild reversal, it appears shareholders expect CEOs William Harrison and Sandy Weill will soon be handcuffed by Attorney General Eliot Spitzer and dragged kicking and screaming off to Sing Sing," Shanley said in a report Thursday.

Liquidity at the banks is very sturdy, the analyst said, adding: "We would not be a panic seller of this [JPMorgan] credit."

Seeking to calm fears after testimony on Capitol Hill regarding their roles in the Enron affair, Citigroup put out a press release telling its side of the story. JPMorgan went a step further and held a conference call with investors in hopes of dispelling various rumors that have been swirling on Wall Street.

S&P also jumped in to concur that concerns about JPM's liquidity position were "unfounded," Shanley noted.

"The freefall in the markets can in no way be considered good news for JPMorgan, which has hitched its wagon to the fortunes of the capital markets, but a liquid balance sheet positions the company to ride out the current upheaval," the analyst said.

"We're not attorneys and we won't venture a legal opinion on the Enron morass," Shanley added.

She noted, Citigroup and JPMorgan assert, in the words of Citi's release: "The transactions we entered into with Enron were entirely appropriate at the time based on what we knew and what we were told by Enron."

But the steady stream of negative press and criticism from Congressional leaders like U.S. Senator Carl Levin, do little to burnish the reputations of the two banks, she achnowledged.

"We find it hard to believe a legal or regulatory settlement would cost JPMorgan anything like the $8.8 billion it saw sliced off its market capitalization on Tuesday, before recovering some ground yesterday," Shanley said.

The Enron financings are by no means the only clouds hanging over JPMorgan, she said.

The downdraft in the markets doesn't bode well for the performance of JPMorgan's $8.2 billion investment portfolio, she said, noting the bank's private equity losses in the second quarter totaled $125 million, or for a near-term rebound in investment banking revenues.

"Problems in the energy sector suggest there may be new credit-related concerns in the pipeline," Shanley said.

JPMorgan's consumer businesses did well in the second quarter, but she said increased regulatory scrutiny of the credit card industry is another potential trouble spot.

"Notwithstanding the bad news, investor fears may be overblown, at least on the bond side," the analyst said.

Even after absorbing higher credit costs, JPMorgan's second quarter earnings topped $1.0 billion, she noted.

"Contrary to rumor, there are no debt issues with triggers linked to the stock price, and no material issues as of now in the derivatives book," Shanley said.

"Liquidity at the parent is more than sufficient to cover near-term maturing debt obligations, and there are no immediate issues limiting the ability of JPMorgan's subsidiaries to send dividends upstream to the holding company."

Even if JPMorgan loses the pending litigation over about $1.0 billion in Enron-related surety receivables, she noted the company says the impact on its capital ratios would only be around 10 basis points.

At June 30, she pointed out that JPMorgan's Tier 1 capital ratio totaled a healthy 8.7%.

The Tier 1 leverage ratio, based on average assets rather than risk-adjusted assets, is not as strong relative to peers at 5.4%, but she said she believes this reflects the concentration of JPMorgan's balance sheet in lower-risk liquid assets, which carry a lower risk weighting."

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