JPMorgan 1Q profit drops 70% as it readies for loan defaults

JPMorgan Chase is preparing for the possibility that customers ranging from credit card holders to oil companies could fail to pay back billions of dollars in loans as the economy reels from the coronavirus outbreak

JPMorgan said Tuesday that first-quarter profit plunged nearly 70%, as it boosted its reserves for potentially bad loans by nearly $7 billion. The bank warned it could boost those reserves even further in the April-June period,

The coronavirus outbreak has shut down businesses across the country and put millions of Americans out of work. Borrowers who were in fine shape just weeks ago are now struggling financially and at risk of defaulting on their loans. The Federal Reserve and the U.S. government are taking unprecedented steps to ensure credit markets can function and to get badly needs funds to households and small businesses.

JPMorgan CEO Jamie Dimon said it was necessary for the bank to set aside significant funds “given the likelihood of a fairly severe recession.” The last time JPMorgan had to increase the amount in reserve for bad loans to such a degree was the first quarter of 2009 — in the depths of the Great Recession.

The nation’s largest bank by assets, JPMorgan said profit fell to $2.87 billion in the first quarter from $9.18 billion in the same period a year earlier. Wells Fargo, the nation's largest mortgage lender, said profit fell 95% as it boosted bad loan reserves by $3.1 billion.

JPMorgan is one of the nation’s largest credit card issuers. Millions of Americans who lost their jobs are now at risk of defaulting on their credit card accounts. The bank also recorded loan losses in its wholesale lending division from the oil and gas industry and businesses that directly deal with U.S. consumers, such as retailers.

In total, JPMorgan has more than $8 billion set aside for bad loans, but even that may not be enough. Chief Financial Officer Jennifer Piepszak told reporters Tuesday that its credit losses were “a best guess” based on the U.S. unemployment rate rising to more than 10%, with a recovery in the second half of the year. She said that after the quarter ended, the bank's economists revised their estimate for U.S. unemployment to 20% and expect gross domestic product to drop by 40% in the second quarter.

Dimon told reporters that he expects the reopening of the U.S. economy to be “staggered" over the coming “weeks and months" - a less rosy scenario than what the White House has been painting.

Banks like JPMorgan have been trying to appear as helpful as possible to politicians and the public in this pandemic, given the financial industry was at the center of the last economic crisis. Banks have been giving consumers longer grace periods to make credit card and loan payments, and have been waiving fees.

Most banks have continued to lend as well — they largely went into the crisis with strong balance sheets able to withstand the downturn. JPMorgan said it allowed businesses to draw on more than $50 billion in existing credit lines and approved an additional $25 billion in new credit lines last quarter.

One bright spot in the bank’s results came from trading. Markets across the world were extremely volatile last quarter — the 11-year bull market in the U.S. came to a screeching halt in March — which gave Wall Street traders ample opportunity to trade. JPMorgan's stock and bond trading revenues rose 34% and 28%, respectively.

The bank's first-quarter profit of 78 cents per share missed estimates, but analysts had struggled for weeks to figure out how to measure the coronavirus’s impact on companies like JPMorgan and the estimates varied wildly.