JPMorgan Chase is preparing for the possibility that customers ranging from credit card holders to oil companies could fail to pay back billions of dollars in loans as the economy reels from the coronavirus outbreak.
JPMorgan said Tuesday that first-quarter profit plunged nearly 70 per cent, as it boosted its reserves for potentially bad loans by nearly $US7 billion ($10.9 billion). The bank warned it could boost those reserves even further in the April-June period,
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., says the bank is preparing for the likelihood of a “severe recession.” Credit:Bloomberg
The coronavirus outbreak has shut down businesses across the country and put millions of Americans out of work. Borrowers who were in fine shape just weeks ago are now struggling financially and at risk of defaulting on their loans. The Federal Reserve and the US government are taking unprecedented steps to ensure credit markets can function and to get badly needs funds to households and small businesses.
JPMorgan CEO Jamie Dimon said it was necessary for the bank to set aside significant funds "given the likelihood of a fairly severe recession." The last time JPMorgan had to increase the amount in reserve for bad loans to such a degree was the first quarter of 2009 – in the depths of the Great Recession.
The nation's largest bank by assets, JPMorgan said profit fell to $US2.87 billion in the first quarter from $US9.18 billion in the same period a year earlier. Wells Fargo, the nation's largest mortgage lender, said profit fell 95 per cent as it boosted bad loan reserves by $US3.1 billion.
JPMorgan is one of the nation's largest credit card issuers. Millions of Americans who lost their jobs are now at risk of defaulting on their credit card accounts. The bank also recorded loan losses in its wholesale lending division from the oil and gas industry and businesses that directly deal with US consumers, such as retailers.
In total, JPMorgan has more than $US8 billion set aside for bad loans, but even that may not be enough. Chief Financial Officer Jennifer Piepszak told reporters that its credit losses were "a best guess" based on the US unemployment rate rising to more than 10 per cent, with a recovery in the second half of the year. She said that after the quarter ended, the bank's economists revised their estimate for US unemployment to 20 per cent and expect gross domestic product to drop by 40 per cent in the second quarter.
Dimon told reporters that he expects the reopening of the US economy to be "staggered" over the coming "weeks and months" – a less rosy scenario than what the White House has been painting.
Banks like JPMorgan have been trying to appear as helpful as possible to politicians and the public in this pandemic, given the financial industry was at the centre of the last economic crisis. Banks have been giving consumers longer grace periods to make credit card and loan payments, and have been waiving fees.
Most banks have continued to lend as well – they largely went into the crisis with strong balance sheets able to withstand the downturn. JPMorgan said it allowed businesses to draw on more than $US50 billion in existing credit lines and approved an additional $US25 billion in new credit lines last quarter.
One bright spot in the bank's results came from trading. Markets across the world were extremely volatile last quarter – the 11-year bull market in the US came to a screeching halt in March – which gave Wall Street traders ample opportunity to trade. JPMorgan's stock and bond trading revenues rose 34 per cent and 28 per cent, respectively.
The bank's first-quarter profit of 78 cents per share missed estimates, but analysts had struggled for weeks to figure out how to measure the coronavirus's impact on companies like JPMorgan and the estimates varied wildly.
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