JPMorgan’s Jamie Dimon: “Is a recession possible? Absolutely’
JPMorgan’s pandemic boom ended with a 42% drop in profits and a warning that rising inflation and war in Ukraine pose big threats to the US economy.
Chief executive Jamie Dimon said the economy was strong and growing, citing double-digit growth in card spending, low delinquencies and healthy balance sheets for households and consumers.
But the bank surprised Wall Street by setting aside $900 million in new funds to prepare for economic turbulence; a year ago it released $5.2 billion it had set aside for possible loan losses in the early months of the pandemic.
These additional funds could cushion the bank if the economy tips into recession, leading to an increase in defaults. Dimon said the risk remains remote but increased after Russia invaded Ukraine and inflation hit a 40-year high.
“These are very powerful forces, and these things are going to collide at some point,” Dimon said. “Nobody knows what will happen.”
A recession, he says, is far from a sure thing. “Is it possible? Absolutely,” he said.
The nation’s largest bank has an almost unprecedented view of the US economy, with a window into the finances of US households and businesses large and small.
The bank posted a profit of $8.28 billion in the first quarter, compared with $14.3 billion a year ago.
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Revenue fell 5% to $30.72 billion, ahead of analysts’ expectations of $30.59 billion, according to FactSet.
JPMorgan shares fell 3.2% to $127.30 on April 14. The stock is now down about 20% this year, while the S&P 500 is down 7%.
Profits are expected to decline across the banking sector. Analysts expect S&P 500 banks to report first-quarter profits of about $27 billion, down 37% from a year ago, according to FactSet.
Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo report on April 14, while Bank of America will go it alone on April 18.
JPMorgan took credit charges totaling $1.5 billion. Of the $900 million set aside for potential future losses, about a third was related to Russia, chief financial officer Jeremy Barnum said. The rest, he said, is to account for the risk that interest rate hikes by the Federal Reserve will slow the economy too much, leading to a recession.
Consumer spending on credit cards increased 29%, with a 64% increase in travel and entertainment spending. Consumers also began to take on more debt, with credit card loans increasing by 15%. Although card lending remains below pre-pandemic levels, the increase potentially signals that some customers have started to consume stimulus funds that have protected them throughout the pandemic.
Yet a 15% increase in deposits from consumers and small businesses indicates that many remain strapped for cash.
Losses on consumer loans were only 0.5% of loans outstanding, and there were fewer loans in 30-day and 90-day default than a year ago.
Rising tariffs and supply chain issues have rattled other areas of JPMorgan’s consumer business, which saw its total revenue decline in the quarter. Mortgages fell 37% from a year ago, mainly due to soaring interest rates on home loans. Auto loan originations fell 25% due to a shortage of available vehicles.
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A sharp decline in IPO volume helped to slump revenue 7% and profit 26% at JPMorgan’s corporate and investment bank.
The unit also suffered losses of $524 million related to the bank’s exposure to commodities and Russia, including $120 million in nickel-related trading losses. JPMorgan is a leading margin lender to Chinese metals giant Tsingshan Holding Group, whose giant nickel short position plunged as the price of the metal surged following Russia’s invasion of Ukraine.
Total investment banking fees fell 31%. Stock subscription fell 76% to its worst quarter in six years.
Trading revenue fell 3% from a year earlier, when corporate debt sales, IPOs and an army of individual investors fueled a stock market boom. Fixed income trading fell 1% and equity trading fell 7%.
Markets will become even more choppy in the coming months as the Fed strives to get inflation under control, Dimon said. The central bank raised interest rates last month for the first time since 2018, and it is expected to continue raising rates throughout the year.
“I can’t foresee any scenario where you won’t have a lot of volatility in the markets,” he said. “It could be good or bad for trading, but there’s almost no chance it won’t happen.”
However, higher rates also make loans more profitable because they allow banks to charge more on loans. The bank’s net interest margin, a measure of what it collects on loans less what it pays for deposits, rose to 1.67% from 1.63% at the end of December.
Total loans rose 6%, a welcome sign after two years of weak loan growth.
Write to David Benoit at [email protected]
This article was published by Dow Jones Newswires