JPMorgan Chase may look like it is playing defense, but a lot of things are still going its way.
The lender's second-quarter profit fell by nearly 30% from a year earlier even as revenue ticked a bit higher. Expenses rose, but there also was a big reversal from a loan-loss reserve release a year earlier to a reserve build in the most recent quarter. This was primarily a consequence of fast loan growth—a year-over-year quarterly average jump of 7% means more lending income and more theoretical losses. But it also partly reflected "a modest deterioration in the economic outlook," the bank said.
It was no surprise that investors reacted nervously , sending the stock down more than 4% Thursday morning. But it is important to note that JPMorgan's commentary was hardly dire. The median consumer deposit balance shrank across all income segments for the first time since the pandemic started as spending grew faster than incomes, the bank said. But the lender also said that consumers' cash buffers were still elevated, giving them a good cushion in the event of a recessionary environment. And despite inflation, they continued to grow discretionary purchases even as necessity spending, notably on gas, was higher. The year-over-year increase in spending on gas the bank observed was just about matched by the increase in spending on travel and dining.
Keep in mind, too, that JPMorgan is being pushed into some defensive moves by rising capital ratio requirements set in Washington. With its stress-capital buffer requirement coming in higher than expected in the June Federal Reserve stress test result, JPMorgan didn't increase its quarterly dividend. It also said on Thursday that it has temporarily suspended share repurchases.
That might count as another strike against the stock for some investors. But here again, the underlying picture isn't so dire. The suspension of buybacks to help build capital faster could prove to be brief. In the June quarter the bank also demonstrated an ability to manage the growth of risk-weighted assets—the denominator in a key capital ratio—even as lending boomed, lowering its credit and market-risk-driven weightings. The bank's core equity capital ratio improved from 11.9% in the first quarter to an estimated 12.2% in the second.
The bank's leaders emphasized to analysts and reporters that it can continue to carefully manage risk-weighted asset growth by scrutinizing the exact kind of lending it does. The question is whether the bank can do this so surgically that it doesn't also have to adjust its return targets or reduce its ability to drive organic capital generation through earnings.
For example, the bank might sell even more of the mortgages it originates. JPMorgan also said it dialed back so-called bridge lending to companies doing deals. That doesn't necessarily help with corporate finance fees, but the opportunity cost may be low right now given the overall rough deal environment.
The bank would rather not have to act so defensively. Chief Executive Jamie Dimon has frequently criticized the methodology of stress tests and accounting rules for loan loss reserving. The bank's outlook for consumer credit losses remains strong, as it still expects card net charge-offs to be less than 2% this year. It raised its net interest income forecast for this year by another $2 billion or so, to $58 billion or more, excluding the volatile markets unit.
This all might be cold comfort right now. But it is all important context as investors try to figure out how to navigate the coming quarters.