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JP Morgan admits poor credit management - BANKING
Source: Financial Times
Date: May 8, 2003
Author: Gary Silverman
JP Morgan Chase has acknowledged that recent credit management performance was unacceptable and it detailed internal reforms aimed at paring back its risk concentrations.
The bank told investment analysts yesterday that its previous procedures had failed to prevent it from developing excessive exposures to industries such as telecommunications.
JP Morgan said it had recently centralised its credit approval process and introduced a new risk model to prevent such problems. But the bank said it could take two to three years to reduce all concentrations to desired levels.
Don McCree, chief credit officer, said: "When we look back at the last 18 months ... our results are not acceptable. We don't like what happened to us and we are trying to change our activities around credit risk management."
JP Morgan's credit costs in investment banking soared from $1.2bn in 2001 to $2.4bn in 2002. Its return on equity in investment banking was a dismal 7 per cent last year.
Mr McCree said that telecommunications and cable companies accounted for $1.5bn of last year's credit costs. He said 10 corporate relationships accounted for most of the credit losses.
JP Morgan's excessive credit concentrations resulted, in part, from a management model that gave too much authority to dealmakers at the bank, he said. Under the new structure, Mr McCree will oversee credit decisions and the bank will assess risk across all asset classes - meaning that it will consider its giant private-equity portfolio when looking at exposures.
Bank officials said a new risk model installed on April 1 also embraced methods that used prices in the equity markets to help assess credit risk. This approach has been popularised in recent years by Moody's KMV.
JP Morgan's reliance on market prices to assess its credit risk led analysts to ask whether it was moving closer to marking its loans to market prices. However, JP Morgan said it still opposed such an accounting regime. Traditional investment banks have called for marking loans to market prices to prevent financial conglomerates with commercial banking arms - such as JP Morgan - from using lending to win investment banking work.
The briefing came amid indications that JP Morgan is winning back the trust of some investors. Worth as little as $20.75 a share on March 12, it was trading at $30.75 by midday yesterday.
JP Morgan officials said they also detected positive trends in the loan market, including new structures that would enable banks to receive higher yields from former investment grade companies that ran into trouble and drew down credit lines.
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