JPMorgan builds its reserves, warns of ‘storm clouds’

Loan growth at JPMorgan Chase is moving in the right direction, and credit quality remains uncharacteristically strong, but there are signs the momentum may not last.

One hint of the uncertainty: the bank’s decision to add $902 million in loan-loss reserves during the first quarter. The move marks JPMorgan’s first buildup of reserves since the second quarter of 2020, when it socked away $8.9 billion, and comes after the release of $15.6 billion in reserves over the six most recent quarters.

The nation’s largest bank by assets remains upbeat about the U.S. economy, but inflation and the war in Ukraine are “storm clouds on the horizon,” CEO Jamie Dimon warned Wednesday during the company’s first-quarter earnings call. Supply-chain issues are another possible headwind, he said.

“I can’t tell you the outcome of it,” Dimon told analysts. “I hope those things all disappear and go away, we have a soft landing, and the war is resolved. I just wouldn’t bet on all of that.”

Dimon’s comments largely reflected the message in his annual letter to shareholders, which was released earlier this month. In the letter, Dimon warned of “potential negative outcomes” due to economic and geopolitical challenges.

Including the $902 million addition to credit reserves, JPMorgan’s provision for loan losses totaled $1.5 billion for the quarter ending March 31, the company reported.

That figure included $524 million of losses related to widening funding spreads, credit valuation adjustments following the company’s nickel exposure and markdowns related to Russia-associated counterparties, JPMorgan said. Total net charge-offs during the quarter were $582 million.

The larger reserves contributed to a sharp decline in the firm’s quarterly net income, which totaled $8.3 billion, down 42% from the same period last year. Earnings per share were $2.63, nine cents short of the average estimate of analysts polled by FactSet Research Systems.

Shares in New York-based JPMorgan fell Wednesday by 3.2%.

Some aspects of JPMorgan’s earnings report, which is often viewed as a bellwether for the U.S. banking industry, were more positive. Its average loans grew by 5%, and its deposits rose by 18%. Spending on the company’s debit and credit cards increased by 21% as travel and dining picked up.

Card balances rose by 11%, car loans were up 3% and commercial banking loans rose 2%, the company said. The bank recorded net interest income of $14 billion, up 7% from the same period a year earlier.

Though consumer confidence has taken a hit in recent months, Dimon said that he does not think the United States is headed toward a recession. He pointed to consumer spending trends and the $2 trillion in U.S. checking and savings accounts.

“The consumer has money. They pay down credit-card debt,” Dimon said. “Businesses are in good shape. Home prices are up. Credit is extraordinarily good.”

“That’s going to continue in the second quarter, third quarter,” he said. “After that, it’s hard to predict.”

JPMorgan’s expenses totaled $19.2 billion for the quarter, up 2% year over year. For the full year, the company is forecasting expense growth of 8% to $77 billion, a relatively large jump that has sparked concern among the company’s investors.

Analysts will be watching to see if other large and regional banks followed JPMorgan’s lead in building their credit reserves during the first quarter. Several banks are scheduled to release their quarterly earnings Thursday.

JPMorgan’s miss on earnings per share and its “larger than expected” credit reserve build “could weigh on JPMorgan and the bank shares in general,” analyst Jeffery Harte of Piper Sandler wrote in a research note.

The addition of credit reserves for the first time since the early days of the pandemic is notable, he wrote.

“Does this represent conservatism in an uncertain macro environment or something more onerous?” Harte wondered.

Gerard Cassidy, an analyst at RBC Capital Markets, was more upbeat. He wrote in a research note that JPMorgan’s net interest income was “stronger than expected,” which offset its higher expenses and growing loan-loss reserves.

JPMorgan is expected to unveil new details about its businesses and growth plans during an investor day scheduled for May 23.

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