JPMorgan Chase's (JPM -0.37%) quarterly earnings beat analysts' revenue and earnings expectations and illustrated the strength of the company's fortress balance sheet, which was well-positioned for today's higher-interest-rate environment. CEO Jamie Dimon discussed the bank's triumphs in the quarter, including its growing retail deposits, adding market share in investment banking, and growth of its assets under management.
Despite the company's success, Dimon was measured and cautioned investors about ongoing inflation and interest rates going even higher. Here's what he had to say and what he suggests JPMorgan investors should do from here.
JPMorgan Chase CEO Jamie Dimon spoke of risks to the global economy
Dimon discussed conflicts in Ukraine and Israel, saying that the recent attacks "may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships" and that it "may be the most dangerous time the world has seen in decades." He remains cautious about inflation and interest rates, as well.
The CEO referred to tight labor markets and "extremely high government debt levels," which are "increasing the risks that inflation remains elevated and that interest rates rise further from here."
Dimon's past comments proved to be prescient
As CEO of the largest bank in the U.S., Dimon closely monitors the economy and the geopolitical factors that may impact it. It's also important to understand that the CEO isn't making any predictions about what will happen next. Instead, he's looking at various outcomes that may affect the economy and banking industry and trying to position JPMorgan Chase best for those possible outcomes.
With that said, Dimon has done an excellent job of navigating JPMorgan through a challenging economic backdrop in recent years. In 2021, the CEO warned investors that inflation could "go higher than people think." At the time of the comments, the year-over-year change in the consumer price index (CPI) was over 6% and it reached as high as 9% in mid-2022.
The following year, Dimon made a similar warning about interest rates. At the time, Federal Reserve officials projected its federal funds rate in 2023 to be under 3%. Today, that rate is up to 5.5%.
Interest rates could very well keep rising. According to Dimon, the federal funds rate could get as high as 7% as the Federal Reserve continues its fight to bring inflation down to its 2% target.
US Consumer Price Index YoY data by YCharts.
Why some banks are at risk (but not JPMorgan Chase)
Rising interest rates already played a significant role in the economy earlier this year. Silicon Valley Bank, a subsidiary of SVB Financial, was at the forefront of turmoil in the regional banking sector in March. The bank, which catered to the start-up and venture-capital community, saw an outflow of deposits as funding to this part of the economy dried up. As deposits declined, the bank had to sell some of its bond holdings to increase its liquidity. The problem was that many of the bonds were purchased when interest rates were low, and the bank was forced to sell these bonds at a big discount. On March 8, the bank announced it had sold $21 billion in available-for-sales bonds, resulting in a $1.8 billion after-tax loss.
Eventually, federal regulators seized Silicon Valley Bank. The event (as well as similar liquidity troubles for a few other regional banks) left a lasting impact on bank stocks. Investors shied away from many of these stocks, especially the ones that have seen sizable deposit outflows and may have significant unrealized losses in their bond portfolios.
Several banks continue grappling with the effects of elevated interest rates, but JPMorgan isn't one of them. While the bank did add a sizable amount of bonds and securities to its holdings during the ultra-low interest rate era in 2021, it held even more capital in the form of cash and liquid securities.
This conservatism, paramount to JPMorgan's "fortress balance sheet," had the bank well-positioned to acquire the struggling First Republic Bank's deposits and assets earlier this year while still maintaining cash to put to work on higher-yielding assets. In the third quarter, the bank grew net revenue by 22% and net income by 35% year over year while maintaining over $1.4 trillion in cash and marketable securities.
JPMorgan Chase is one bank stock worth owning
Dimon's comments may make investors uneasy. However, by weighing the risks, JPMorgan Chase positioned itself well for a wide range of outcomes. Thanks to its fortress balance sheet, the bank enjoys a strong capital position and is on solid footing to deliver -- no matter what the economy does.
Under Dimon's leadership, JPMorgan performed well across different environments. Despite the challenges other banks face, JPMorgan Chase is on solid footing if inflation and interest rates go higher, making it one bank stock investors can hold on to for the long haul.
