It was a remarkable second quarter for JPMorgan Chase (NYSE: JPM), which managed to report a profit of roughly $4.7 billion after setting aside nearly $10.5 billion to cover future potential loan losses. That $10.5 billion quarterly credit provision is larger than any quarterly provision the bank took during the Great Recession, and perhaps its largest ever. Offsetting the provision was a record $33.8 billion in total revenue for the company. The main driver behind this number was $16.4 billion in revenue generated by JPMorgan's corporate and investment bank division, $9.7 billion of which came from fixed-income and equity markets trading revenue.
Despite the company's great results during a very difficult quarter, the coronavirus pandemic is far from over, and JPMorgan Chase CEO Jamie Dimon acknowledged there is still much uncertainty moving forward. Here's what else Dimon had to say about JPMorgan's earnings and the economy on the bank's second-quarter earnings call.
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1. The recession will not hit banks right away
Perhaps the weirdest part of the coronavirus pandemic for banks is that actual losses are not materializing as they normally do in a recession. Typically, after a bank reports a high quarterly credit provision like JPMorgan did in the first quarter, you would start to see some losses matriculate in the next quarter. But JPMorgan reported net charge-offs (debt unlikely to be collected) of about $1.6 billion in the second quarter, just slightly up from previous quarters. This could be explained by the fact that the government is intervening in unprecedented ways with the Paycheck Protection Program and $1,200 stimulus checks. Many banks are also using a new accounting system that has them project loan losses a lot earlier than they actually materialize.
But the even stranger part in all of this is that there is very little evidence of new credit problems. While non-performing loans -- those that a borrower hasn't made a payment on in over 90 days -- ticked up a few billion dollars from the first quarter, JPMorgan CFO Jennifer Piepszak said on the earnings call that a lot of this was from one client and is not a good representation of overall credit trends. Furthermore, the 30-plus-day delinquency rate declined between the first and second quarters of the year in the home lending, auto, and credit card loan categories, suggesting that fewer borrowers are missing payments or that some borrowers got back into better financial footing over the past three months. That doesn't make a whole lot of sense considering economic conditions.
"In a normal recession, unemployment goes up, delinquencies go up, charge-offs go up, home prices go down. None of that is true here," said Dimon. He added that "you will see the effect of this recession; you're just not going to see it right away because of all of the stimulus," and the fact that many people who are unemployed are making more money now than they were working.
2. Economic conditions will be murky
A few months ago, many experts and economists predicted that the second quarter could be the worst of the entire pandemic, with three full months of the virus, including a period when many states implemented shelter-in-place orders. But Dimon told analysts on the bank's earnings call to expect a "much murkier economic environment" going forward than what materialized in May and June.
"You have to be prepared; you're going to have a lot of ins and outs. You're going to have people get scared about COVID; they're going to get scared about the economy, small businesses, bankruptcies, emerging markets. It's just going to be murky," he said. Dimon added that he doesn't think anyone knows how bad things could get, or if there will be another surge in coronavirus cases -- or another big economic shutdown -- in the fall. He said the bank is preparing for the worst, but that "we simply don't know" the probability of a worst-case scenario happening.
3. JPMorgan's dividend is sustainable
Dimon continued to emphasize that he believes the current $0.90 per common share dividend is "completely sustainable," and a "completely minuscule" quarterly charge. He also seemed to suggest that the bank could sustain a few more quarters of heavy losses and still sustain the dividend, specifically saying the bank could "bear another $20 billion of loan loss reserves." That makes a certain amount of sense because at the end of the second quarter, the bank's total allowance for loan losses reached $34.3 billion.
In its annual stress testing, the Federal Reserve projected that in a severely adverse scenario where gross domestic product (GDP) declines 8.5% over the next few quarters and unemployment peaks at 10%, the bank would book total credit provisions of almost $58 billion.
Dimon acknowledged that if the economy enters an extremely adverse scenario, the bank's board "should and would" consider reducing the dividend. "The reason they would consider reducing it is because once you enter 14% or 15% unemployment, you don't know the future. So now you're going to have to look at another extremely adverse case, which is going to be 20% unemployment and therefore you protect yourself from that, and cutting the dividend is cheap equity."
On the other hand, Dimon said if a less severe "base case" scenario ends up playing out, and loan losses are not as bad as initially expected, the bank would ultimately have too much capital on hand, and would then ideally want to conduct stock buybacks, which all of the large banks put on hold earlier this year. "We don't expect that this year, but I wouldn't completely rule it out in the fourth quarter," Dimon said.
4. Trading revenue will normalize
Part of the reason JPMorgan Chase was able to generate profits in the quarter was due to extremely high trading revenue. Fixed-income market trading brought in revenue of $7.3 billion, levels that were 99% higher from the second quarter of 2019. The bank made another $2.4 billion from equity markets trading, and had total markets and securities trading revenue of $11.3 billion. But Dimon expects revenues in the company's investment bank division to soon normalize. On the company's earnings call, he also told analysts to cut trading revenues in half. Even at that level, trading revenues would still be substantially higher than they were in recent quarters.
5. Credit reserve builds may have peaked
With the first and second quarters of the year now in the books, JPMorgan has set aside a whopping $19 billion to cover potential loan losses. As bad as this is, this may actually be the worst of it from a quarterly provision perspective. At the beginning of the year, many banks such as JPMorgan began using a new accounting system called the current expected credit losses (CECL) methodology. Essentially, the system requires banks to project future losses on loans as soon as those loans are originated and put onto their balance sheet. The idea is to give banks a better sense of what future loan losses look like as early as possible.
Both Dimon and Piepszak said if the assumptions behind their modeling, such as GDP and unemployment, hold up, they do not expect to see meaningful credit reserve builds in upcoming quarters. Part of this is because of the way CECL has banks forecast loan losses. With such uncertainty ahead, things could certainly change, but this is still a good test for CECL to see if the new -- and controversial -- accounting methodology works as intended.
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