JPMorgan Chase (NYSE: JPM) is currently the largest bank in the USA by total assets. Because of this status, JPMorgan is naturally able to feel the pulse of the country’s economy. The bank’s latest earnings conference call – for the second quarter of 2024 – was held three weeks ago and contained useful insights on the state of American consumers and businesses. The bottom-line is this: The US economy is stronger than what many would have thought a few years ago given the current monetary conditions, but there are signs of weakness such as slightly higher unemployment and slower GDP growth; at the same time, inflation and interest rates may stay higher than the market expects, and the Fed’s quantitative tightening may have unpredictable consequences.
What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. Broader financial market conditions suggest a benign economic outlook, but JPMorgan’s management continue to be vigilant about potential tail risks; management is concerned about inflation and interest rates staying higher than the market expects, and the effects of the Federal Reserve’s quantitative tightening
While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks. These tail risks are the same ones that we have mentioned before. The geopolitical situation remains complex and potentially the most dangerous since World War II — though its outcome and effect on the global economy remain unknown. Next, there has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. Therefore, inflation and interest rates may stay higher than the market expects. And finally, we still do not know the full effects of quantitative tightening on this scale.
2. Net charge-offs (effectively bad loans that JPMorgan can’t recover) rose from US$1.4 billion a year ago, mostly because of card-related credit losses that are normalising to historical norms
Credit costs were $3.1 billion, reflecting net charge-offs of $2.2 billion and a net reserve build of $821 million. Net charge-offs were up $820 million year-on-year, predominantly driven by Card…
…I still feel like when it comes to Card charge-offs and delinquencies, there’s just not much to see there. It’s still — it’s normalization, not deterioration. It’s in line with expectations.
3. JPMorgan’s credit card outstanding loans was up double-digits
Card outstandings were up 12% due to strong account acquisition and the continued normalization of revolve.
4. Auto originations are down
In auto, originations were $10.8 billion, down 10%, coming off strong originations from a year ago while continuing to maintain healthy margins.
5. JPMorgan’s investment banking fees had strong growth in 2024 Q2, partly because of favourable market conditions; management is cautiously optimistic about the level of appetite that companies have for capital markets activity, but headwinds persist
This quarter, IB fees were up 50% year-on-year, and we ranked #1, with year-to-date wallet share of 9.5%. In advisory, fees were up 45% primarily driven by the closing of a few large deals and a weak prior year quarter. Underwriting fees were up meaningfully, with equity up 56% and debt up 51%, benefiting from favorable market conditions. In terms of the outlook, we’re pleased with both the year-on-year and sequential improvement in the quarter. We remain cautiously optimistic about the pipeline, although many of the same headwinds are still in effect. It’s also worth noting that pull-forward refinancing activity was a meaningful contributor to the strong performance in the first half of the year…
…In terms of dialogue and engagement, it’s definitely elevated. So I would say the dialogue on ECM [Equity Capital Markets] s elevated and the dialogue on M&A is quite robust as well. So all of those are good things that encourage us and make us hopeful that we could be seeing sort of a better trend in this space. But there are some important caveats.
So on the DCM [Debt Capital Markets] side, yes, we made pull-forward comments in the first quarter, but we still feel that this second quarter still reflects a bunch of pull-forward, and therefore, we’re reasonably cautious about the second half of the year. Importantly, a lot of the activity is refinancing activity as opposed to, for example, acquisition finance. So the fact that M&A remains still relatively muted in terms of actual deals has knock-on effects on DCM as well. And when a higher percentage of the wallet is refi-ed, then the pull-forward risk becomes a little bit higher.
On ECM, if you look at it kind of [ at a removed ], you might ask the question, given the performance of the overall indices, you would think it would be a really booming environment for IPOs, for example. And while it’s improving, it’s not quite as good as you would otherwise expect. And that’s driven by a variety of factors, including the fact that, as has been widely discussed, that extent to which the performance of the large industries is driven by like a few stocks, the sort of mid-cap tech growth space and other spaces that would typically be driving IPOs have had much more muted performance. Also, a lot of the private capital that was raised a couple of years ago was raised at pretty high valuations. And so in some cases, people looking at IPOs could be looking at down rounds, that’s an issue. And while secondary market performance of IPOs has improved meaningfully, in some cases, people still have concerns about that. So those are a little bit of overhang on that space. I think we can hope that over time that fades away and the trend gets a bit more robust.
And yes, on the advisory side, the regulatory overhang is there, remains there. And so we’ll just have to see how that plays out.
6. Management is seeing muted demand for new loans from companies as current economic conditions make them cautious
Demand for new loans remains muted as middle market and large corporate clients remain somewhat cautious due to the economic environment and revolver utilization continues to be below pre-pandemic levels.
7. Demand for loans in the commercial real estate (CRE) market is muted
In CRE, higher rates continue to suppress both loan origination and payoff activity.
8. Lower income cohorts are facing a little more pressure than higher income cohorts because even though the US economy is stronger than what many would have thought a few years ago given the current monetary conditions, there is currently slightly higher unemployment and slower GDP growth
As I say, we always look quite closely inside the cohort, inside the income cohorts. And when you look in there, specifically, for example, on spend patterns, you can see a little bit of evidence of behavior that’s consistent with a little bit of weakness in the lower-income segments, where you see a little bit of rotation of the spend out of discretionary into nondiscretionary. But the effects are really quite subtle, and in my mind, definitely entirely consistent with the type of economic environment that we’re seeing, which, while very strong and certainly a lot stronger than anyone would have thought given the tightness of monetary conditions, say, like they’ve been predicting it a couple of years ago or whatever, you are seeing slightly higher unemployment, you are seeing moderating GDP growth. And so it’s not entirely surprising that you’re seeing a tiny bit of weakness in some pockets of spend.
9. The increase in nonaccrual loans in the Corporate & Investment Bank business is not a broader sign of cracks happening in the business
[Question] I know your numbers are still quite low, but in the Corporate & Investment Bank, you had about a $500 million pickup in nonaccrual loans. Can you share with us what are you seeing in C&I? Are there any early signs of cracks or anything?
[Answer] I think the short answer is no, we’re not really seeing early signs of cracks in C&I. I mean, yes, I agree with you like the C&I charge-off rate has been very, very low for a long time. I think we emphasized that at last year’s Investor Day. If I remember correctly, I think the C&I charge-off rate [ over the preceding ] 10 years was something like literally 0. So that is clearly very low by historical standards. And while we take a lot of pride in that number and I think it reflects the discipline in our underwriting process and the strength of our credit culture across bankers and the risk team, that’s not — we don’t actually run that franchise to like a 0 loss expectation. So you have to assume there will be some upward pressure on that. But in any given quarter, the C&I numbers tend to be quite lumpy and quite idiosyncratic. So I don’t think that anything in the current quarter’s results is indicative of anything broader and I haven’t heard anyone internally talk that way, I would say.
10. Management is unwilling to lower their standards for risk-taking just because it has excess capital because they think it makes sense to be patient now given their current assessment of economic risk
And of course, for the rest of the loan space, the last thing that we’re going to do is have the excess capital mean that we lean in to lending that is not inside our risk appetite or inside our credit box, especially in a world where spreads are quite compressed and terms are under pressure. So there’s always a balance between capital deployment and assessing economic risk rationally. And frankly, that is, in some sense, a microcosm of the larger challenge that we have right now. When I talked about if there was ever a moment where the opportunity cost of not deploying the capital relative to how attractive the opportunities outside the walls of the company are, now would be it in terms of being patient. That’s a little bit one example of what I was referring to.
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