Dimon's not worried about JPMorgan's exposure to private credit

• Key insight: JPMorganChase isn't seeing credit issues crop up, but CEO Jamie Dimon thinks people should beware.
• Supporting data: The company has $50 billion of exposure to private credit, but its total provision for credit losses came down in the first quarter.
• Expert quote: "When there's a credit cycle, losses will be worse than people expect." — CEO Jamie Dimon

JPMorganChase CEO Jamie Dimon reiterated Tuesday that he isn't worried about the threat of private credit to the banking system. But the larger impacts of a potential downturn in the overall credit market will be worse than people expect, he said.

America's biggest bank has about $50 billion of exposure to the $1.7 trillion private credit industry, JPMorgan Chief Financial Officer Jeremy Barnum said during the company's first-quarter earnings report. But the $4.9 trillion-asset company doesn't expect losses in that sector to put much pressure on its balance sheet, or on the broader banking industry.

"We do a lot to ensure that we're well protected, so we're reasonably comfortable with our exposure here," Barnum said on a Tuesday call with the media. "But obviously, if you see a big credit cycle with significant increase in default rates, you're going to see some losses across the whole system, including banks."

The private credit market has been under strain the past few months, as AI-related fears have spurred investor panic. Record redemption requests and increasing default risks have raised questions about the safety of banks, which have been rapidly increasing their business in the private credit space in recent years.

But the alarm around private credit has trickled beyond Wall Street. The Federal Reserve has also probed banks for their exposures to private credit in efforts to assess the total stress on the system, Bloomberg reported.

On Tuesday morning, Wells Fargo reported its private-credit exposure was about $36.2 billion, while Citigroup said it had about $22 billion of loans in the sector.

Dimon said that banks typically take senior positions on these loans, and that JPMorgan always has agreements in place to look at the underlying collateral. Barnum said the company also takes precautions regarding portfolio diversification, quality underwriting, client selection, advance rates and cash-flow traffic mechanisms.

JPMorgan doesn't look to bulk up on its private-credit portfolio, Dimon added. The company offers such loans based on client demand, he said.

"Certain things we turn down, if we don't like the covenants, the underwriting, or the ability to move assets out of the secured company," Dimon said. "We're perfectly willing to have our balance sheet go down. If, in fact, we think credit is getting stretched, you will see us not make loans.

"Loans — all of them — are an outcome of doing good business, Dimon said."

Last quarter, the bank said it had only seen one charge-off in its nonbank financial institution loan portfolio, which totaled about $160 billion at the time, per the bank's definition. The lone loss came from collapse of Tricolor Holdings last fall, which caused a domino-effect of credit hits across financial institutions due to alleged fraud.

Dimon added Tuesday that, while there are pockets where asset quality has taken a dip, overall quality of private credit hasn't gotten far worse.

Dimon said, however, that people should be focused on the impact of a recession at large.

"When there's a credit cycle, losses will be worse than people expect," Dimon said on the first-quarter earnings call. "I don't think [private credit risk is] systemic. It almost can't be systemic at that size, relative to anything else. But, when recessions happen and values go down, and people refi at higher rates, they'll be stressed and strain the system."

But for now, Dimon said, the American economy is resilient, largely thanks to the relatively stable job market.