Dimon should keep JPMorgan’s powder dry for now

January 13, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Jamie Dimon faces a luxury problem. The boss of JPMorgan, which reports earnings Friday, reckons the bank will generate up to $50 billion in excess capital over the next three years. The question is what should he do with such a windfall?

He already hopes to reinstate the dividend, cut during the financial crisis, and may even buy back shares, if regulators allow. But the veteran dealmaker must be sorely tempted to go on a spending spree. Analysts are already talking up the benefits of acquisitions both at home and abroad. But holding fire makes more sense.

The obvious target at home is Atlanta-based SunTrust. The lender’s Florida, Georgia and South Carolina branches would fill JPMorgan’s last remaining major domestic retail banking hole. And the New York-based firm could scoop it up and just remain under the cap forbidding banks from buying their way above a 10 percent share of deposits.

But a deal would not be easy. JPMorgan would probably have to write down a big chunk of SunTrust’s loan book, particularly commercial real estate, which would argue for paying a discount to SunTrust’s current $14 billion market cap. That’s what M&T Bank did when it purchased Wilmington Trust at a 45 percent discount.

But SunTrust’s financials are improving — it posted a profit in the third quarter after a run of losses — so the board should be loath to sell on the cheap without regulators forcing its hand. And SunTrust still holds $4.9 billion of government capital from the Troubled Asset Relief Program that JPMorgan’s owners would have to assume.

Moreover, it may not be the best use of capital. U.S. retail banking is hardly a fast-growing business. Scoping out investment opportunities abroad may be better. Dimon is bulking up the firm’s international businesses, last year promoting trusted lieutenant Heidi Miller to oversee its expansion of services to corporations around the world.

But there’s no need to pounce on competitors just yet. Europe’s debt woes have probably heightened the appeal of shifting business to JPMorgan’s solid balance sheet already. The longer the Continent’s crisis continues, the more chance there is it’ll throw up some good bank assets at bargain prices — and not just in Europe. Spanish banks, for example, have some juicy assets in Mexico and Latin America.

For now, at least, patience may be Dimon’s best path to pleasing shareholders.

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