JPMorgan Chase's $1.2B cash-reserve boost leads big banks as lenders brace for slowing economy

By Steve Gelsi

Banks employed different approaches to their loan-loss strategies, according to an analysis of their Q2 results by MarketWatch

JPMorgan Chase & Co. led major U.S. banks in total cash reserves, and their percentage increase from the previous quarter, by setting aside an additional $1.2 billion for potential losses on loans in the second quarter, as banks across the board eye an uncertain economic landscape.

JPMorgan Chase's larger balance-sheet buildup stands out partly because it's the U.S.'s largest bank, with quarterly earnings that topped $18 billion in the second quarter alone.

Overall, banks employed a variety of strategies to prepare for potential loan losses as they scanned their loan books for possible trouble, according to an analysis of second-quarter updates from many of the U.S.'s largest financial firms. (See chart below of major bank provisions for loan losses).

   Large U.S. Banks (excluding trust banks)   Ticker   Total assets ($bil)  Provision for LLR - Q2, 2024 ($mil)  Provision for LLR - Q1, 2024 ($mil)  Provision for LLR - Q2, 2023 ($mil)  Q2 increase from Q1  Q2 increase from year-earlier quarter 
   JPMorgan Chase & Co                         JPM                  $4,143                               $3,052                               $1,884                               $2,899                  62%                                     5% 
   Bank of America Corp.                       BAC                  $3,258                               $1,508                               $1,319                               $1,125                  14%                                    34% 
   Citigroup Inc.                               C                   $2,406                               $2,351                               $2,432                               $1,757                  -3%                                    34% 
   Wells Fargo & Co.                           WFC                  $1,940                               $1,236                                 $938                               $1,713                  32%                                   -28% 
   Goldman Sachs Group Inc.                     GS                  $1,653                                 $282                                 $318                                 $615                 -11%                                   -54% 
   Morgan Stanley                               MS                  $1,212                                  $76                                  -$6                                 $161                  N/A                                   -53% 
   U.S. Bancorp                                USB                    $680                                 $568                                 $553                                 $821                   3%                                   -31% 
   PNC Financial Services Group Inc.           PNC                    $557                                 $235                                 $155                                 $146                  52%                                    61% 
   Truist Financial Corp.                      TFC                    $520                                 $451                                 $500                                 $538                 -10%                                   -16% 
   Capital One Financial Corp.                 COF                    $480                               $3,909                               $2,683                               $2,490                  46%                                    57% 
   Charles Schwab Corp.                        SCHW                   $450                                  N/A                                  N/A                                  N/A                  N/A                                    N/A 
   American Express Co.                        AXP                    $272                               $1,268                               $1,269                               $1,198                   0%                                     6% 
   Citizens Financial Group Inc.               CFG                    $220                                 $182                                 $171                                 $176                   6%                                     3% 
   M&T Bank Corp.                              MTB                    $209                                 $150                                 $200                                 $150                 -25%                                     0% 
   New York Community Bancorp Inc              NYCB                   $119                                 $390                                 $315                                  $49                  24%                                   696% 
   First Citizens Bancshares Inc.             FCNCA                   $220                                  $95                                  $64                                 $151                  48%                                   -37% 
   Huntington Bancshares Inc.                  HBAN                   $178                                 $100                                 $108                                  $92                  -7%                                     9% 
                                                                                                                                                                                                                                      Source: FactSet 

As economists and pundits from Wall Street to Washington ponder whether the economy is headed for a recession or not, banks with greater direct exposure to U.S. consumer loans set aside more reserves to reflect expected patterns in the economy.

Most banks added to their reserves in the second quarter against the previous quarter by a range of 6% to 62%, while others subtracted from their reserves by as much as 25%.

Commercial lenders set aside reserves for specific loans they expect to be unrenewable, even if payments are current. The reserves also cover late payments.

Others opted to reduce their reserves if they had already set aside enough in previous quarters to handle their loan books.

Most of the increases had been expected by Wall Street, which has been bidding up bank stocks for much of this year on an expected boost from lowered interest rates.

"When it comes to card charge-offs and delinquencies, there's just not much to see there. It's normalization, not deterioration. It's in line with expectations." JPMorgan Chase CFO Jeremy Barnum on July 12

It's all part of what banks call the "normalization" of credit trends, as the financial system moves beyond the roughly 10-year period of artificially low interest rates following the global financial crisis.

The question remains, however, whether that normalization could lead to challenges for banks to maintain their credit strength.

So far this has not been the case, as most banks reported no significant drops in their credit strength this quarter.

To be sure, in the weeks since banks' latest quarterly updates in mid-July, the U.S. monthly jobs report sparked more concern about a potential recession, although the economy continued to add positions - albeit at a weaker pace.

Jitters about an economic hard landing also resurfaced during the stock market's steep three-day plunge, which included a 1,000-plus point drop for the Dow Jones Industrial Average DJIA on Monday.

JPMorgan sees 'normalization not deterioration'

During the second quarter, JPMorgan Chase made the largest dollar increase in its loan-loss provisions from the previous quarter among major banks. It stashed away about $1.2 billion more to bring the total to $3.05 billion on June 30. That's an increase of 62%.

PNC Financial Services hiked its loan-loss reserves by 52%, or $80 million, to $235 million, while Capital One Financial's provisions jumped 46% to $3.9 billion.

JPMorgan Chase's provisions includes net charge-offs - money the bank doesn't expect to be paid back - mostly in its credit-card portfolio, as well as a buildup in reserves, a bank spokesperson said in an email to MarketWatch.

The bank's charge-off rate for credit cards remained about flat from the previous quarter and was in line with its prior forecasts, the spokesperson added.

The buildup in reserves included in the bank's provisions for loan losses was driven by its card business and was "100% consistent with our prior guidance of building card reserves on the back of continued strong loan growth," the spokesperson said.

During JPMorgan Chase's July 12 earnings call with analysts, Chief Financial Officer Jeremy Barnum said the bank's credit-card balance sheet is "not a very interesting story" overall.

"When it comes to card charge-offs and delinquencies, there's just not much to see there," Barnum said. "It's normalization, not deterioration. It's in line with expectations."

The bank continues to track higher unemployment and slower economic growth, with a "tiny bit of weakness" in consumers with less discretionary income, he said.

The move by JPMorgan Chase appears to fit the bank's longstanding approach under Chief Executive Jamie Dimon to maintain a "fortress" balance sheets as consumers take longer to pay back credit-card bills and other borrowers face trouble paying back their loans.

When it comes to setting aside money to cover potential loan losses, one size definitely did not fit all for banks in the second quarter, as interest rates remain high and the economy shows signs of slowing down.

Philip van Doorn contributed.

-Steve Gelsi

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08-07-24 1359ET

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