- JPMorgan set aside nearly $9 billion in the second quarter to cover future loan losses even though those losses haven’t shown many signs of appearing.
- CFO Jennifer Piepszak said that’s because government stimulus and loan forbearance programs are hiding the potential pain the bank expects consumers and businesses to feel in the coming months.
- Analysts peppered Piepszak and CEO Jamie Dimon on the company’s earnings call, seeking clarity on how the bank is looking to the future and what that will mean for efforts to put more money aside for loan losses.
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JPMorgan executives set aside nearly $9 billion in the second quarter to cover future loan losses.
The catch? The increase wasn’t in response to a corresponding increase in loan losses, despite a US economy in which some 14.7 million jobs have been lost thanks to four months of lockdowns that put a near stop to various parts of the economy.
JPMorgan, the biggest US bank by assets, said companywide charge-offs climbed just 7% to $1.6 billion.
“The way we have to think about reserving is all about the outlook because we’re not actually seeing it today,” JPMorgan CFO Jennifer Piepszak told analysts on Tuesday.
That’s because a key link that banks use for predicting future loan losses has broken down in the face of unprecedented government stimulus, loan forbearance, and uncertainty about how many more people will become infected by the coronavirus.
On a call with media earlier in the day, Piepszak described the relationship between charge-offs and reserves and explained why it has been so hard for JPMorgan to get an accurate gauge of how many customers may ultimately end up late on their loans.
“Given where we are in this crisis, the relationship between the business cycle and the health of the business sector and the health of the household sector is broken,” she said. “We really haven’t started to see what you would typically see in the middle of a recession like this because of the amount of stimulus and support that is out there. So, while we have seen some signs that are encouraging in May and June, May and June are really the easy months in terms of what this recovery could look like.”
Piepszak said customers may really start feeling the pain later this year and into next year. Faced with such uncertainty, the bank took an opportunity afforded by better-than-expected revenue from its trading business and used that it to top off its loan-loss reserve, according to a report from KBW’s Brian Kleinhanzl.
Read more:JPMorgan volatility traders raked in $700 million through June — 3 times what they brought in for all of 2019. Here’s how they outpaced Goldman Sachs and Morgan Stanley on the hottest trade of the year.
JPMorgan runs five different economic scenarios when predicting loans losses and business activity, and told analysts about a base case and some more extreme situations that might play out if the economy takes another leg down. Piepszak said the bank more heavily weighted the more pessimistic outlooks.
“We did lean in more heavily,” she said, “to what we would have otherwise done. We certainly thought having a conservative bias there was the prudent thing to do.”
Even so, the lack of details and mounting evidence that the US may have lost control of the pandemic led to some tense moments on the call as analysts sought different ways to get JPMorgan’s executives to provide some sort of certainty around how they think the next few months and years will play out.
Florida yesterday reported more than 15,000 new coronavirus cases, setting a single-day state record for new infections.
“Since the end of the quarter, we’re seeing an increase in COVID cases in Florida and Texas and California and elsewhere,” Wells Fargo analyst Mike Mayo asked CEO Jamie Dimon. “Isn’t there a link between an increase in COVID cases with death with economic activity? Or how do you think about that?”
Mayo asked Dimon and Piepszak to update their outlook on the economy since the second quarter closed. Dimon said nothing has changed.
“We feel exactly the same that we did at the end of the quarter,” Dimon said. “We were very clear; we cannot forecast the future. We don’t know.”
The CEO went on: “You’re going to have a much murkier economic environment going forward than you had in May and June. You have to be prepared for that,” he said. “If you look at the base case, an adverse case, an extreme adverse case, they’re all possible. And we’re just guessing about the probabilities of those things.”
Morgan Stanley analyst Betsy Graseck tried to get the executives to talk about how many borrowers currently in forbearance might become delinquent.
Piepszak, while acknowledging the bank does consider those borrowers to be higher risk, had this to say: “It is still too early to really read a whole lot into what we’re seeing,” she said. “The visibility here remains low, I would say, given the amount of support that is out there.”
Matt O’Connor, a Deutsche Bank analyst, tried a different tack, asking a question about the timing of when executives expect to start seeing charge offs.
“First, we have to start seeing delinquencies,” Piepszak said. “Later this year, but next year will be much heavier on charge-offs as you think about realizing the assumptions that we’ve made in the reserve. It’s difficult to know.”
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