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 fourth quarter of 2024 – was held earlier this week and contained useful insights on the state of American consumers and businesses. The bottom-line is this: the US economy remains resilient, but two significant risks remain, namely, persistent inflation and dangerous geopolitical conditions
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 US economy remains resilient, with low unemployment and healthy consumer spending; businesses are now more optimistic about the economy
The U.S. economy has been resilient. Unemployment remains relatively low, and consumer spending stayed healthy, including during the holiday season. Businesses are more optimistic about the economy, and they are encouraged by expectations for a more pro-growth agenda and improved collaboration between government and business.
2. Management sees two significant risks, namely, persistent inflation, and the most dangerous geopolitical conditions since World War II; management thinks a high level of optimism is embedded in asset prices; management is focused on being prepared for a wide range of scenarios
Two significant risks remain. Ongoing and future spending requirements will likely be inflationary, and therefore, inflation may persist for some time. Additionally, geopolitical conditions remain the most dangerous and complicated since World War II…
…We think it’s important to acknowledge the tension in the risks and uncertainties in the environment and the degree of optimism embedded in asset prices and expectations. In that context, we remain upbeat about the strength of the franchise, but we are focused on being prepared for a wide range of scenarios.
3. Net charge-offs for the whole bank (effectively bad loans that JPMorgan can’t recover) rose from US$2.2 billion a year ago; Consumer & Community Banking’s net charge-offs rose by US$0.4 billion from a year ago
Credit costs were $2.6 billion, reflecting net charge-offs of $2.4 billion and a net reserve of $267 million…
…In terms of credit performance this quarter, credit costs were $2.6 billion, reflecting net charge-offs of $2.1 billion, up $428 million year-on-year driven by card. The net reserve build was $557 million predominantly driven by higher card revolving balances.
4. JPMorgan’s credit card outstanding loans was up double-digits; management expects card loans to grow in 2025, but at a slower pace than in 2024
Card outstandings were up 11% due to strong account acquisition and revolvers…
… We expect healthy card loan growth again this year but below the 12% pace we saw in 2024 as tailwinds from revolver normalization are largely behind us.
5. Auto originations were up
In auto, originations were $10.6 billion, up 7%, reflecting higher lease volume on robust new vehicle inventory.
6. JPMorgan’s investment banking fees had strong growth in 2024 Q4, with strong growth in debt underwriting and equity underwriting fees, signalling higher appetite for capital-markets activity from companies; management is optimistic about companies’ enthusiasm towards capital markets activities
IB fees were up 49% year-on-year, and we ranked #1 with wallet share of 9.3% for 2024. Advisory fees were up 41%, benefiting from large deals and share growth in a number of key sectors. Underwriting fees were up meaningfully with debt up 56% and equity up 54% primarily driven by favorable market conditions. In terms of the outlook for the overall Investment Banking wallet, in light of the positive momentum, we remain optimistic about our pipeline.
7. Management is seeing companies paydown bank loans and is not seeing loan growth, but the lack of loan growth is not necessarily a negative thing, as it involves companies having wide access to capital markets
Global Corporate and Investment Banking loans were down 2% quarter-on-quarter driven by paydowns and lower short-term financing, primarily offset by originations. In Commercial Banking, middle market loans were also down 2% driven by paydowns, predominantly offset by new originations. And commercial real estate loans were flat as new originations were offset by paydowns…
…I think given the significant improvement in business sentiment and the general optimism out there, you might have expected to see some big open loan growth. We are not really seeing that. I don’t particularly think that’s a negative. I think it’s probably explained by a combination of wide open capital markets and so many of the larger corporates accessing the capital markets and healthy balance sheets in small businesses and maybe some residual caution. And maybe there are some pockets in some industries where some aspects of the policy uncertainty that we might be facing are making them a little bit more cautious than they otherwise would be about what they’re executing in the near term. But we’ll see what the new year brings. The current optimism starts getting tested with reality one way or the other.
8. Management is incorporating interest rate cuts in 2025
We expect 2025 NII ex Markets to be approximately $90 billion. Going through the drivers, as usual, the outlook assumes that rates follow the forward curve. It’s worth noting that the NII decrease is driven by both the cut expected in 2025 and the impact of the 100 basis points of cuts in the back half of 2024.
9. Management expects credit card net charge-offs in 2025 of 3.6%, up from 3.34% in 2024
On credit, we expect the 2025 card net charge-off rate to be in line with our previous guidance of approximately 3.6%.
10. Management has extra capital for JPMorgan as they think there’s a good chance the bank can deploy the capital at better prices in the future, but they’re not increasing the size of the extra capital
The way we’re thinking about it right now is that we feel very comfortable with the notion that it makes sense for us to have a nice store of extra capital in light of the current environment. We believe there is a good chance that there will be a moment where we get to deploy it at better levels essentially in whatever way than the current opportunities would suggest. And so that feels like a correct kind of strategic and financial decision for us. Having said that, having studied it quite extensively over the last 6 months and have all these debates you would expect, we’ve concluded that we do have enough. We have not [indiscernible]. And given that, we would like to not have the excess grow from here.
11. The mortgage market for housing looks poor given the high interest rates there
You know well the state of the mortgage market given rates.
12. Management thinks that the biggest sources of risk to the credit market are unemployment and stagflation
Just the biggest driver of credit has been and always will be unemployment, both on the consumer side and it feeds into the corporate side. It feeds into mortgages, subprime, credit card. So really it’s your forecast of unemployment. You have to make your own, which will determine that over time. And so the second thing you said vulnerabilities. It’s unemployment, but the worst case would be stagflation. High rates with higher unemployment will drive higher credit losses literally across the board. I’m not — we’re not predicting that, but you just ask for the vulnerabilities. That’s the vulnerabilities.
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