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Consumer Loan Reserves Crimp Profits at JPM, Other Big Banks

Once earnings season kicked off Friday it quickly became clear that as much as much as the fretting over energy lending has subsided, it has been replaced by a new concern: consumer credit.

JPMorgan Chase — the largest U.S. bank by assets — and a number of its biggest rivals posted sharp increases in loan-loss reserves within their consumer banking divisions in the third quarter.

JPMorgan increased the provision in its consumer bank by nearly fourfold, compared with a year earlier. PNC Financial Services Group and Citigroup also boosted their reserves by 82% and 38%, respectively.

The reserve build shows how banks are paying a price for their recent expansion in consumer lending. Many especially have sought to build up their credit card portfolios, luring in new, profitable customers by offering a range of covetable perks, such as cash back or expedited airport security check-ins.

But it also reflects recent efforts to woo borrowers with somewhat-blemished credit. Over the past year, JPMorgan has expanded its card portfolio into a fuzzy area of the FICO band, the 660-740 range, which carries higher loss rates but still evades the taboo of being called "subprime."

During a conference call with analysts, Marianne Lake, the chief financial officer of JPMorgan, put a positive spin on the higher reserves, saying that the company is getting paid for taking on additional credit risks.

As borrowers run into trouble repaying, it will "cause us to build our reserve, but for the right reasons," Lake said, describing the increase in consumer chargeoffs as "gentle."

JPMorgan boosted consumer lending reserves by 233% to $1.3 billion. For the company as a whole, reserves rose 86%, though the pace decelerated in recent months as problems associated with the recent oil crash eased.

Overall, profits in the community and consumer banking division dipped 16%, to $2.2 billion.

The higher provisions come as the market for consumer lending heats up.

Banks across the industry have made personal loans and credit cards a bigger priority, particularly as commercial loan growth has begun to slow down. So far asset quality within consumer lines of credit has remained strong, according to a recent report from the Federal Deposit Insurance Corp. Yet the rise in consumer-related provisions at several banks last quarter raised a question as to whether credit metrics might worsen.

JPMorgan has attracted headlines for the popularity of its new Sapphire Reserve card, which has been a hit with millennials. The card carries a high annual fee, but it includes perks such as a subsidy for TSA PreCheck at airports, among other travel benefits.

Overall JPMorgan opened 2.7 million credit card accounts in the third quarter, a 35% increase from year earlier.

That growth was not all good news for the JPMorgan's credit card division. The company has said in recent months that chargeoffs in its consumer bank could rise as it moves down the FICO spectrum.

During an investor conference last month, Gordon Smith, JPMorgan's head of consumer and community banking, said the company had added more borrowers with lower FICO scores in a bid to boost risk-adjusted returns.

Between 2013 and 2015, the average credit score on newly issued credit cards at JPMorgan fell to 747, compared with 759 in 2012.

"We didn't move the credit box — we just expanded a little bit more into it," Smith said.

During the third-quarter call Friday, Glenn Schorr, an analyst with Evercore ISI, noted that the increase in delinquencies in credit cards was striking, given that credit quality across JPMorgan has been climbing.

Delinquency rates of more than 30 days increased 15 basis points to 1.53% in credit cards, but declined in other major business lines, such as mortgage banking and student loans.

"I know you've been guiding towards that, but it's the only part of credit that has anything but great trends," Schorr said.

Still, the uptick in consumer loan reserves was overshadowed by what was otherwise a positive quarter for asset quality at big banks. Most lenders continued to put the oil woes of the first half of the year behind them, releasing a portion of the reserves in their oil portfolios.

JPMorgan, Citigroup, Wells Fargo and PNC have all posted slight declines in provision expenses in the last few quarters.

Additionally, for JPMorgan, the Friday call marked the first time Chairman and Chief Executive Jamie Dimon officially handed the call over to Lake. He had indicated during a conference call with analysts last year that he planned to make the handoff, though it had been expected sooner.

"Before you go, I just want to tell you: One of these days I'm not going to come in on this call," Dimon said. "Marianne has started to do such a good job that I've become unnecessary to be in all of them, and I can obviously go do other things."

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