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Bank One shares tumble
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August 25, 1999: 3:23 p.m. ET
Stock plunges as much as 25% after earnings warning, downgrades
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NEW YORK (CNNfn) - Bank One Corp. shares plunged as much as 25 percent Wednesday after it warned that 1999 earnings probably will ring in about 8 percent less than analysts' estimates, a result of poorer-than-expected returns from its credit card unit.
Bank One, the fifth-biggest U.S. bank and second-biggest credit card issuer, reported after the bell Tuesday that it expects full-year 1999 operating earnings of $3.60 to $3.65 a share. That's down about 8 percent from current market estimates, though still about 12 percent above 1998's operating earnings. Analysts had expected earnings of $3.92 a share.
Investors wasted no time selling Bank One (ONE) shares Wednesday, sending the stock down 12-3/4 to 42-7/8 at midday. Other banking company shares fell in tandem with Bank One. Citigroup Inc. (C), the largest issuer of credit cards, fell 1-9/16 to 47-7/16, Chase Manhattan (CMB) slid 2-7/16 to 84-1/8, American Express Co. (AXP) fell 4-7/8 to 143 and MBNA Corp. (KRB) dropped 2 to 28-1/16. First Union Corp. (FTU) fell 1-7/16 to 43-1/4.
"We are clearly disappointed in this earnings estimate revision," Bank One President John McCoy said, adding that the company already has taken several steps to fix the problem, including modifying the interest rates and other fees it charges on new cards and allocating additional marketing and staff resources to keep customers from bailing out to other credit cards.
"We believe this is a short-term problem, a problem that can be fixed," McCoy added.
Losing Market Share
At issue is First USA, the credit card unit Bank One bought two years ago that's proven quite lucrative, at least until recently. According to McCoy, First USA found itself losing market share in its most recent quarter because of strong competition from other credit-card companies and because of internal changes in how it collects payment from its existing clients, changes that led some of those clients to bail out.
What's more, the Chicago-based company spent a significant amount of capital developing marketing arrangements with Web sites such as America Online Inc., agreements that haven't generated nearly as much revenue as the bank had hoped, according to analysts.
Even so, some owners and watchers of Bank One stock saw the decline as overdone.
Punishment was swift for Bank One shares Wednesday
"It's both an overreaction and genuinely negative news," said Robert Friedman, chief investment officer with Franklin Mutual Advisors, which held roughly 8.6 million Bank One shares at the end of June. "Earnings are still going to be higher than last year, so to take the stock down to where it is is kind of ridiculous."
Indeed, Friedman and other analysts agreed that, while First USA's problems were a definite gaffe and will have a negative impact on the otherwise stellar performance of its parent, the long-term outlook for Bank One remains positive.
"No one had any indication that the problem would be as big as it is," said Michael Ancell, a banking analyst with Edward Jones in St. Louis. Still, "I do think it's a visceral reaction that seems somewhat overdone." Ancell currently has a "buy" rating on the stock and has no plans to change it.
Not as kind
Other analysts weren't nearly as kind, releasing a barrage of downgrades on the stock. Warburg Dillon Read analyst Thomas Hanley cut his rating on Bank One to "hold" from "buy," while Merrill Lynch analyst Sandra Flannigan cut her near-term rating on the stock to "neutral" from "accumulate." PaineWebber cut its rating to "neutral" from "buy," and Morgan Stanley Dean Witter reduced Bank One to "neutral" from "strong buy." CIBC World Markets, Salomon Smith Barney and several other firms also downgraded the stock.
At its current price per share, however, Bank One is trading at 10 times its 1999 earnings, "placing it well below many of its competitors and making it an excellent buying opportunity," Friedman said. On top of that, Bank One's core business is doing well and should continue to improve over the next 12 months, he said.
Its credit card business, meantime, will be impaired for the next few quarters but will recover as the company rebuilds and expands its market share, Friedman said. "I'm glad they owned up to this quickly," he said. "Now we'll see if they make up for it quickly." 
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Bank One
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