JPMorgan Chase's (JPM -0.48%) CEO Jamie Dimon is not one to mince words. Within the last several months, we've already heard Dimon tell investors to brace for an economic "hurricane."
Even more recently, Dimon said the U.S. economy will find itself in a recession within the next six to nine months, and that while he doesn't know for sure, he could easily see the S&P 500 falling another 20%.
But none of that could be seen in JPMorgan Chase's third-quarter earnings report. Credit quality looked squeaky clean and the balance sheet is also still near historical lows in terms of loan losses and delinquencies. So, what is Dimon so worried about? Let's take a look.
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JPMorgan Chase is not seeing the pain in the numbers
JPMorgan Chase reported a very solid quarter given the environment, but nothing looked better than its credit quality -- which, despite all of the worrying headlines about the economy, remains in remarkably good shape.
The bank's net charge-off rate, which looks at debt unlikely to be collected as a percentage of total loans, ticked up ever so slightly in the third quarter. This is to be expected, though, because the bank has started to grow loans again this year and there are always going to be some amount of losses. Still, the bank's net charge-off rate was a paltry 0.27% in Q3.
Thirty- and 90-day delinquencies are up a little bit in the quarter. But this is not a surprise because of loan growth and because some normalization is to be expected now with consumer savings declining and fiscal stimulus programs winding down.
In fact, some near-term forecasts for credit improved. Management is now guiding for the net charge-off rate in JPMorgan's credit card portfolio to be just 1.5% for the full year. Credit cards tend to have higher default rates, so this is a really strong forecast.
While the bank's provision for future loan losses in the quarter was about $800 million, double the reserve added last quarter, the bank's total reserve set aside for loan losses is actually smaller than it was a year ago on a percentage basis.
Prepare for future cracks
When asked bluntly by an analyst on the bank's earnings call about whether management was starting to see cracks in credit quality, CFO Jeremy Barnum said: "The short answer to that question is just no. We just don't see anything that you could realistically describe as a crack in any of our actual credit performance."
He added:
We've done some fairly detailed analysis about different cohorts and early delinquency bucket entry rates and stuff like that. And we do see, in some cases, some tiny increases. But generally, in almost all cases, we think that's normalization, and it's even slower than we expect.
Dimon said that while there are no cracks right now, he sees future cracks in the numbers as "quite predictable" when you consider persistent inflation, higher interest rates, and higher oil prices, as well as further volatility from Russia's ongoing invasion of Ukraine.
Dimon is being a prudent manager
When you consider how high inflation is this year and the fact that the personal savings rate in the U.S. is now much lower than it was pre-pandemic, I am pleased with how strong credit remains even though we still have a ways to go.
Dimon added that the consumer is quite strong right now and will likely head into a recession this way, which is a good thing.
But at some point, economic conditions are -- or at least they're supposed to be if history is any indication -- going to get worse. The Federal Reserve raised interest rates incredibly fast and inflation is going to continue to drain savings. The labor market should eventually deteriorate, which is when things could start to take a turn, although it's hard to know how much unemployment will rise.
Dimon is simply doing what most good managers do, which is trying to prepare people for the worst-case scenario if it comes, which it very well might considering how things are trending.
