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 third quarter of 2024 – was held last week and contained useful insights on the state of American consumers and businesses. The bottom-line is this: the world remains treacherous, but the US economy – and the consumer – remains on solid footing
What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. The geopolitical situation looks treacherous to JPMorgan’s management, and could have major impacts on the economy in the short term
We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse. There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history.
2. The US economy remains resilient, but there are risks; JPMorgan’s management wants to be prepared for any environment, as they think the future can become quite turbulent
While inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. While we hope for the best, these events and the prevailing uncertainty demonstrate why we must be prepared for any environment…
…I’ve been quite clear that I think things — or the future could be quite turbulent.
3. Net charge-offs for the whole bank (effectively bad loans that JPMorgan can’t recover) rose from US$1.5 billion a year ago; Consumer & Community Banking’s net charge offs rose from US$0.5 billion a year ago
Credit costs were $3.1 billion, reflecting net charge-offs of $2.1 billion and a net reserve build of $1 billion, which included $882 million in Consumer, primarily in Card and $144 million in Wholesale. Net charge-offs were up $590 million year-on-year, predominantly driven by Card…
…In terms of credit performance this quarter, credit costs were $2.8 billion driven by Card and reflected net charge-offs of $1.9 billion, up $520 million year-on-year and a net reserve build of $876 million predominantly from higher revolving balances.
4. JPMorgan’s credit card outstanding loans was up double-digits
Card outstandings were up 11% due to strong account acquisition and the continued normalization of revolve.
5. Auto originations are down
In Auto, originations were $10 billion, down 2%, while maintaining strong margins and high-quality credit.
6. JPMorgan’s investment banking fees had strong growth in 2024 Q3, signalling higher appetite for capital-markets activity from companies; management is cautiously optimistic about companies’ enthusiasm towards capital markets activities, but headwinds persist
IB fees were up 31% year-on-year, and we ranked #1 with year-to-date wallet share of 9.1%. And advisory fees were up 10%, benefiting from the closing of a few large deals. Underwriting fees were up meaningfully with debt up 56% and equity up 26% primarily driven by favorable market conditions. In light of the positive momentum throughout the year, we’re optimistic about our pipeline, but the M&A, regulatory environment and geopolitical situation are continued sources of uncertainty.
7. Management is seeing muted demand for new loans from companies partly because they can easily access capital markets; demand for loans in the multifamily homes market is muted; management is not seeing any major increase in appetite for borrowing after the recent interest rate cut
In the middle market and large corporate client segments, we continue to see softness in both new loan demand and revolver utilization, in part due to clients’ access to receptive capital markets. In multifamily, while we are seeing encouraging signs in loan originations as long-term rates fall, we expect overall growth to remain muted in the near term as originations are offset by payoff activity…
…[Question] Lower rates was supposed to drive a pickup in loan growth and conversion of some of these Investment Banking pipelines. I mean, obviously, we just had one cut and it’s early. But any beginning signs of this in terms of the interest in borrowing more, and again, conversion of the banking pipelines?
[Answer] Generally no, frankly, with a couple of minor exceptions…
… I do think that some of that DCM [debt capital markets] outperformance is in the types of deals that are opportunistic deals that aren’t in our pipeline. And those are often driven by treasurers and CFOs sort of seeing improvement in market levels and jumping on those. So it’s possible that, that’s a little of a consequence of the cuts…
…I mentioned we did see, for example, a pickup in mortgage applications and a tiny bit of pickup in refi. In our multi-family lending business, there might be some hints of more activity there. But these cuts were very heavily priced, right? The curve has been inverted for a long time. So to a large degree, this is expected. So I’m not — it’s not obvious to me that you should expect immediate dramatic reactions, and that’s not really what we’re seeing.
8. Management expects the yield curve to remain inverted
The way we view the curve remains inverted.
9. Management thinks asset prices are elevated, but they are unclear to what extent
We have at a minimum $30 billion of excess capital. And for me, it’s not burning a hole in my pocket…
…Asset prices, in my view, and you — and like you’ve got to take a view sometimes, are inflated. I don’t know if they’re extremely inflated or a little bit, but I’d prefer to wait. We will be able to deploy it. Our shareholders will be very well served by this waiting…
…I’m not that exuberant about thinking even tech valuations or any valuations will stay at these very inflated values. And so I’m just — we’re just quite patient in that.
10. Consumer spending behaviour is normalising, so a rotation out of discretionary spending into non-discretionary spending is not a sign of consumers preparing for a downturn; retail spending is not weakening; management sees the consumer as being on solid footing; management’s base case is that there is no recession
I think what there is to say about consumer spend is a little bit boring in a sense because what’s happened is that it’s become normal. So meaning — I mean I think we’re getting to the point of where it no longer makes sense to talk about the pandemic. But maybe one last time.
One of the things that you had was that heavy rotation into T&E as people did a lot of traveling, and they booked cruises that they hadn’t done before, and everyone was going out to dinner a lot, whatever. So you had the big spike in T&E, the big rotation into discretionary spending, and that’s now normalized.
And you would normally think that rotation out of discretionary into nondiscretionary would be a sign of consumers battening down the hatches and getting ready for a much worse environment. But given the levels that it started from, what we see it as is actually like normalization. And inside that data, we’re not seeing weakening, for example, in retail spending.
So overall, we see the spending patterns as being sort of solid and consistent with the narrative that the consumer is on solid footing and consistent with the strong labor market and the current central case of a kind of no-landing scenario economically. But obviously, as we always point out, that’s one scenario, and there are many other scenarios.
11. Management thinks that the Federal Reserve’s quantitative tightening (QT) should be wound down because there are signs of stress in certain corners of the financial markets caused by QT
[Question] You I think mentioned QT stopping at some point. We saw the repo sort of market spike at the end of September. Just give us your perspective on the risk of market liquidity shock as we move into year-end. How — and do you have a view on how quickly Fed should recalibrate QT or actually stop QT to prevent some [indiscernible]?
[Answer] The argument out there is that the repo spike that we saw at the end of this quarter was an indication that maybe the market is approaching that lowest comfortable level of reserves that’s been heavily speculated about, and recognizing that, that number is probably higher and driven by the evolution of firms’ liquidity requirements as opposed to some of the more traditional measures…
…It would seem to add some weight to the notion that maybe QT should be wound down. And that seems to be increasingly the consensus, that, that’s going to get announced at some point in the fourth quarter.
12. Management sees inflationary factors in the environment
I’m not actually sure they can actually do that because you have inflationary factors out there, partially driven by QE.
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