J. P Morgan Chase & Co is close to vaulting past Bank of America Corp to become the biggest bank in the United States, but it will likely get there in an odd way - by shrinking less than its rival. Both J. P Morgan Chase and Bank of America are getting smaller as they shake off the excesses of the years leading up to the financial crisis.
If J. P Morgan becomes the biggest, chief executive Jamie Dimon could see the validation of his cautious management before and during the crisis. Bank of America's drop to second would illustrate how former Chief Executive Ken Lewis saddled the bank with bad acquisitions that are hampering current CEO Brian Moynihan.
But bigger might not be better. Being the largest does not necessarily translate to higher profitability, or a higher market value. Global banking regulators are imposing higher capital requirements on the largest banks and threatening even higher capital charges if they grow. "Big is more a burden than it is a bragging right," said Gary Townsend, chief executive of asset manager Hill-Townsend Capital, a Chevy Chase, Maryland-based money manager that specializes in financial stocks and owns shares of both banks.
That is a switch from the years when Bank of America was buying up banks to cater to the American appetite for more and more borrowing, said Ray Soifer, a long-time bank analyst and now industry consultant at Soifer Consultant in Green Valley, Arizona. "Bigger was better and banks were happy to be at the top," said Soifer.
J. P Morgan has been gaining ground on Bank of America for three straight quarters. At the end of March, J. P Morgan's $2.20 trillion of assets were just 3.4 percent short of Bank of America's $2.27 trillion. J. P Morgan already is the most valuable bank in the stock market, with its equity worth nearly 50 percent more than Bank of America's. Analysts differ as to how soon the switch could happen. Deutsche Bank's Matt O'Connor sees J. P Morgan becoming the largest by year end. FBR Capital Markets' Paul Miller says it will be the next 12 to 18 months.
But however long it takes, analysts agree neither bank is going to be stretching. "It is really going to be who shrinks the least," said Gerard Cassidy, an analyst at RBC Capital Markets. Even if J. P Morgan becomes the largest US bank by assets, it would not be the biggest in the world. The bank is about $600 billion short of that title and there are six other banks between it and the biggest. That honour at last count went to BNP Paribas SA.
J. P Morgan spokesman Joseph Evangelist declined to comment. The trend down in the US might not follow a straight line. Banks sometimes temporarily pump up balance sheets to manage their interest rate risk, said Soifer.
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