JPMorgan Chase’s average overall loan book grew 2% from the second quarter to the third quarter.
David Paul Morris/Bloomberg News
If the U.S.’s biggest bank is any indication, lenders are still hunkering down and waiting for economic liftoff.
The good news from JPMorgan Chase’s earnings report is that the emergence of the Delta variant of Covid-19 and the crunch of supply chains seen in the third quarter didn’t hit the bank’s strong core. The bank continued to release loan-loss reserves and even further lowered its outlook for net charge-offs of credit-card debt in 2021, to around 2% from around 2.5% earlier in the year.
Even loan growth, which has been weak thus far as consumers and businesses sit on huge cash piles, is showing some resilience. The bank highlighted that “card payment rates have stabilized” and reported a quarter-over-quarter uptick in card loans at period end. Chief Financial Officer Jeremy Barnum told analysts that the bank sees “evidence of excess deposits starting to normalize among segments of the population that traditionally revolve”—meaning that some people’s cash cushions are slimming, and they may need to borrow in the future. Even the bank’s commercial real-estate lending business now has a “robust origination pipeline,” he said.
Yet it is no bonanza. “It’s going to take time,” Mr. Barnum said of card lending’s further recovery. The bank said that while credit utilization among middle-market businesses is picking up, it remains at stable but very low levels among bigger corporations. JPMorgan’s average overall loan book grew by 2% sequentially from the second quarter to the third quarter, a bit faster than the pace of the second quarter but similar to the first.
But the bank is also playing for the future, at some cost today. JPMorgan said it had higher expenses for marketing in credit cards, which it said may even keep ticking higher. Adding customers builds the bank’s ultimate lending potential—but results in a hit to revenue yields on card loans for now.
JPMorgan could more generally bump up its interest revenue now by deploying more of its huge cash pile—driven largely by that flood of deposits—into the market. But it isn’t. The bank has hundreds of billions in cash theoretically available to shift into higher-yielding instruments such as Treasurys or mortgage bonds. But its quarter-average investment securities assets shrank from the second quarter to the third.
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Though the bank said that rates have risen somewhat lately, coming more in line with its expectations, rates on offer are still quite compressed due to the amount of cash sloshing around in the system. Chief Executive
told analysts that he views JPMorgan’s available liquidity as a way to prepare for potential inflation, which pushes rates and loan amounts higher in the future.
In general, JPMorgan seems well-positioned to benefit from a pickup in activity, once supply chains unsnarl and borrowing demand returns. It is adding market share in retail deposits and still opening branches in new markets. Even under the earnings pressure of low rates, the bank is still running with a core capital ratio that is above its own targeted level, and it also saw its estimated supplementary leverage ratio improve in the third quarter from the second. “Our capital cup runneth over,” said Mr. Dimon.
Yet that strong foundation doesn’t necessarily translate into near-term stock gains, as evidenced by this morning’s more than 2% drop. In fact, the bank’s overall solid share performance, gaining over 25% so far this year, may not be helping matters for now. The appeal of share buybacks to management diminishes as the stock’s valuation gets higher, and it is already hovering around 2.5 times tangible book value.
Of course, capital that might otherwise go to buybacks could be deployed later into a much better earnings environment. Shareholders may have to be prepared for some delayed gratification.
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