Given the current economic environment and analyst projections that there won't be much significant change in that environment a year from now, the banking sector will likely continue to face challenges in 2021. The recession could continue given the uncertainty related to the COVID-19 pandemic. Interest rates will remain low and will probably be in the 0% range, as the Federal Reserve has indicated. These two factors alone don't bode well for an industry that largely moves in tandem with the country's GDP and interest rates.

But if there is an outlier among the major U.S. banks during this current time of uncertainty, it would be America's largest bank, JPMorgan Chase (JPM -0.10%). JPMorgan has been the best-performing big banks over the past decade-plus, including the Great Recession, and has outperformed its competitors in several key metrics during the current recession.

So, where will JPMorgan Chase be this time next year?

Road with 2020 and 2021 written across it, with future years farther down the road.

Image source: Getty Images.

Provision for credit losses

JPMorgan Chase just released its third-quarter earnings report, and it was a relatively strong one. The bank beat earnings estimates with net income of approximately $9.4 billion, or $2.92 diluted earnings per share, up 4% year over year. The company generated $29.9 billion in revenue, about the same as the third quarter of last year. Compared to the second quarter, JPMorgan's net income more than doubled, up 101%.

A big reason for that is a huge reduction in the bank's provisioning for credit losses. The bank set aside $611 million in the quarter, compared to about $10.4 billion last quarter. The third-quarter provision is even less than it was a year ago when it was $1.5 billion. This was a key driver for earnings. Net charge-offs -- debt unlikely to be collected -- were down $191 million year over year in the quarter to $1.2 billion.

But is this drop in credit allowance a reprieve due to the government stimulus plan this spring? Will it result in a temporary improvement in credit quality that will eventually get worse, particularly if there is no second stimulus? While the stock market has bounced back, unemployment remains high and GDP growth is contracting.

An indication that the provision of credit losses will remain manageable for JPMorgan is its loan-to-value ratio (LTV), particularly among its mortgage loans, Chief Financial Officer Jennifer Piepszak explained on the third-quarter earnings call.

"And when you look at the LTV on those -- the loan to value on those loans [mortgage], that's what is embedded into how we're thinking about the -- what charge-offs will look like in the near term. There's still very healthy LTVs on those loans," Piepszak said on the call. She added that she doesn't expect net charge-offs to change much until the back half of the year, but that will be more related to credit cards. This would indicate that allowance for credit losses will remain manageable for JPM, at least in the near term.

The economy, COVID-19, and the election

The fortunes of banks are very dependent on economic growth, and that picture remains clouded by the U.S. presidential election and the COVID-19 pandemic.

It's not only uncertain who will win the election and what effect that will have, but there is also uncertainty about whether or not there will be a contested election or how long that may drag out. One thing we've learned is that anything is possible, considering where we've been. And some of these scenarios won't help the markets or the economy.

The other huge unknown is what happens with COVID-19. There's probably no single factor that will affect the economy more next year. Until safe and effective treatments become available -- whether it is one month, six months, or a year from now -- it's unlikely that a real recovery will begin. Goldman Sachs economists predicted in August that a vaccine will be widely distributed by the end of the second quarter of 2021 and projected annual GDP growth of 6.2%, based on that assumption. In May, the Congressional Budget Office projected GDP growth of 4.2% in 2021.

As for JPMorgan Chase, its "fortress balance sheet" should serve it well through any scenario, just as it did through the Great Recession. It increased its common equity tier 1 (CET1) capital to $198 billion for a CET1 ratio of 13%, which is up 60 basis points. It also increased its liquidity sources to $1.3 trillion. It has the best capital position among the major U.S. banks. It also has the best efficiency ratio of the four major banks at 58% and the best return on equity at 15%.

Mergers and acquisitions

Industry consolidation has been stalled by the pandemic, but there has been a slight uptick in deals in recent months. There have been only 91 deals this year, compared to 257 in 2019, but there were 14 in September, which is the most since January of 2020, according to S&P Global (SPGI -1.00%).

There may be some pent-up mergers and acquisitions activity in 2021, and JPMorgan could certainly be a key player. JPMorgan Chase CEO Jamie Dimon said on Feb. 25, before the full effect of the pandemic, that JPMorgan was looking for deals.

"We are looking, and we will be much more aggressive with acquisitions across the board," Dimon said at the bank's annual investor meeting. "I do think we'll have opportunities to do that." 

Dimon was asked again on the third-quarter earnings call, and he reiterated the sentiment:

"Well, since we have you all on the line, our doors and our telephone lines are wide open. We would be very interested, and we do think you will see consolidation in the business but we're not going to be more specific than that ... There are a lot of issues that will determine whether something makes sense for us in there."

An acquisition between now and the end of 2021 is certainly in play for JPMorgan and could certainly affect the trajectory of the company a year from now.

There is a lot of uncertainty in the next year, but what won't change is the strong management and market position of JPMorgan Chase. It will likely outperform its peers over the next year, due to the financials discussed above, and be the best-positioned for the long term.