Analysis: JPMorgan close to becoming the top U.S. lender

By David Henry

NEW YORK (Reuters) - JPMorgan 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 JPMorgan Chase and Bank of America are getting smaller as they shake off the excesses of the years leading up to the financial crisis.

If JPMorgan 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.

JPMorgan has been gaining ground on Bank of America for three straight quarters. At the end of March, JPMorgan's $2.20 trillion of assets were just 3.4 percent short of Bank of America's $2.27 trillion. JPMorgan 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 JPMorgan 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.

JPMorgan spokesman Joseph Evangelisti declined to comment.


The trend down in the U.S. might not follow a straight line. Banks sometimes temporarily pump up balance sheets to manage their interest rate risk, said Soifer. And there may be lending upturns along the way in borrowing by businesses, as just happened.

Federal Reserve data show the combined assets of 25 large U.S. banks grew by one-half of one percent in the second quarter, largely because of more lending to companies.

But in general, analysts said, banks are no more likely to grow now than their customers are to try to borrow their way to happiness on the strength of higher home prices.

Bank of America and JPMorgan have particular reasons to shrink. To start, they have portfolios of bad assets acquired just before or during the financial crisis. JPMorgan Chase still has more than $80 billion of low-credit quality mortgage and credit card loans, largely acquired when it took over failed lender Washington Mutual in 2008.

As of March 31, Bank of America had more than $100 billion of loans in runoff, mainly in a shrinking portfolio known as the legacy asset servicing division formed in January. Many of the assets are mortgages or home equity loans acquired from Countrywide Financial, which it bought in 2008.

Both banks are likely to let those loans mature without making new ones to replace them, a process known as "running off" assets.

The Countrywide acquisition was a particularly big mistake for Bank of America, FBR's Miller said. The deal has already cost the bank more than $20 billion of its capital, he said. Some of that money is going out the door in the bank's recent $8.5 billion settlement of warranty claims by more than 22 institutional investors over allegedly faulty mortgage-backed securities Countrywide sold.

Bank of America is selling assets and even closing some bank branches as it tries to strengthen its balance sheet by getting smaller.

The bank's goal is "to balance the appropriate amount of assets and risk," said Jerry Dubrowski, a Bank of America spokesman. "Having the largest amount of assets does not make you the best financial services provider and, right now, we're focused on that."

(Reporting by David Henry in New York; additional reporting by Joe Rauch in Charlotte, North Carolina; editing by Andre Grenon)