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What JPMorgan's Loan Loss Provision Says About the Current Recession

By Bram Berkowitz – May 15, 2020 at 10:03AM

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Lots of experts say this economic recession will be far worse than the Great Recession. JPMorgan's credit provision from the first quarter shows us why.

There has been a lot of talk about how the current economic recession could end up being much worse than the Great Recession of 2008-09. But other than looking at GDP and unemployment estimates, it may be hard to picture that. After all, aren't some analysts and government officials predicting that the coronavirus recession will be much shorter than the Great Recession? Aren't the banks in much better shape now? And didn't the housing market collapse in 2008?

The answer to all of those questions is yes. But the severity of the coronavirus pandemic has hit much harder and much faster than anyone could have anticipated. That's because social distancing measures put into place to prevent the spread of COVID-19 have essentially shut down the economy. Even stores and industries such as the airlines that still operate aren't able to generate the same amount of revenue right now compared to normal times. While it is hard to compare the Great Recession to what is going on now, you can get a better sense of how the two stack up by looking at a key metric on JPMorgan Chase's (JPM 2.02%) financial statements.

JPMorgan Chase building

Image source: Getty Images.

The loan loss provision

If you have read about banks recently, you might have seen the term "loan loss provision" or "credit provision." Both refer to the amount of money banks set aside in a given quarter to cover losses from loans that they think may soon default. To be clear, the provision is not a guaranteed loss, but it's a projection of losses that could be coming. In reality, loan losses may not get anywhere close to the provision, or they may far exceed it. Regardless, it is a good indicator of financial stress at a specific time. 

In the Great Recession, banks were widely criticized as one of the main sparks that ignited the recession flame. Today, the banks are believed to be in sound financial shape. But despite massive issues at the banks during the Great Recession, the loan loss provision at JPMorgan after just one quarter of the coronavirus -- or really just a few weeks -- was almost as high as at the peak of the Great Recession. 

JPMorgan Chase Loan Loss Provision Total Assets
Q1 2009 $8.60 billion $2.08 trillion
Q1 2020 $8.29 billion $3.14 trillion

Source: JPMorgan Chase financial statements

As you can see, in the first quarter of 2009 when quarterly loan loss provisions peaked at many banks, JPMorgan reported its highest provision of the recession at around $8.6 billion. In the first quarter of 2020, even with two solid months in January and February before the quarter took a sharp turn in March, JPMorgan set aside an equally large provision.

The bank is much bigger now in terms of total assets, although the bank is really closer to $2.7 trillion in assets as opposed to $3.1 trillion -- JPMorgan is likely much bigger on paper because of all the draw-downs on credit from struggling companies in the first quarter.

Additionally, the bank is operating under the new current expected credit losses (CECL) model, in which it forecasts losses on loans over the life of a loan. Under the old accounting model, banks did not need to plan for losses until they had a specific reason to believe that the credit quality of a loan had begun to deteriorate. CECL likely has the bank provisioning slightly more conservatively than it would have during the Great Recession. But even still, the bank increased its provision by nearly $6.9 billion over the linked quarter.

Although the Great Recession surprised many -- as most recessions do -- the pace at which that the provision grew during that time looks like a slow burn compared to what has happened during this coronavirus downturn:

JPMorgan Chase Loan Loss Provision
Q4 2007 $2.54 billion
Q1 2008 $4.42 billion
Q2 2008 $3.46 billion
Q3 2008 $5.79 billion
Q4 2008 $7.31 billion
Q1 2009 $8.60 billion
Q2 2009 $8.03 billion
Q3 2009 $8.10 billion

Source: JPMorgan Chase financial reports

Despite the calamity of the Great Recession, the single largest swing in the provision was about $2 billion between quarters. Some of the other banks like Bank of America saw much bigger swings in their loan loss provisions during the Great Recession. But I think JPMorgan is a good example to use because it was one of the better-performing big banks during the Great Recession, and didn't have as many of the credit issues that were so different from what is going on now.

What this ultimately means

Loan loss provisions are one indicator of financial stress during a three-month time period because they show how concerned a bank is with people being able to repay their debt. The fact that JPMorgan had a provision in the first quarter of 2020 -- after just a few weeks of the coronavirus -- that was as high as its provision during the peak of the Great Recession shows how quickly the virus affected the economy. Many banks are expecting to keep building their reserves in the second quarter. It's unclear if the provisions will be as high as in the first quarter, but a few more quarters like this last one and banks could start to see loan losses that look like those in the Great Recession. That shows why many experts are predicting such a bad recession in such a short period of time.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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