Is Jamie Dimon warning of a downturn?

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JPMorgan Chase reported what bankers want to see when it comes to lending — solid growth. But Jamie Dimon followed up with a message bankers don’t like to hear: Start preparing for a slowdown.

JPMorgan raised its loan-loss reserves by more than $300 million in the fourth quarter, compared with a reserve-build of about $100 million in the previous quarter. The reserves were almost evenly split between consumer and commercial loans.

On the surface it seems a curious move. After all, the New York bank’s total loans rose 6% to $984.6 billion. And Dimon said during a Tuesday morning conference call that “credit is pristine" while "underwriting standards are pretty good.”

But the stock market swung wildly in December for a reason: Investors are worried that a recession could occur sooner rather than later. JPMorgan says it does not want to get caught flat-footed when that happens.

“We tell our management that we have no problem seeing loan books shrink,” Dimon said during the call with analysts and investors. “Sometimes … you’re better off telling your sales force to play golf rather than to make new loans. We’re not going to be stupid.”

Boosting its loan-loss reserves now, when credit quality is so strong, is a clear signal that Dimon believes things can only get worse from here, said Bain Rumohr, an analyst at Fitch Ratings. After all, JPMorgan’s net charge-off ratio was 1.04% in the fourth quarter.

“Look at their charge-off rate. It cannot get any better,” Rumohr said.

JPMorgan’s loan-loss provision also increased, rising to its highest level in three years. The provision climbed 18% from a year earlier to $1.6 billion.

To be sure, its allowance for loan losses of $13.4 billion in the fourth quarter was 5.5% off its peak during that same period, which was about $14.2 billion in the second quarter of 2016.

But Dimon’s message — start preparing for a downturn now — is one that other banks might also deliver this earnings season, said Christopher Wolfe, an analyst at Fitch.

“I wouldn’t be surprised to see other banks take a more cautious tone about what they see in 2019 and 2020,” Wolfe said.

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JPMorgan’s boost to loan-loss reserves was a consequence of loan growth and very specific problems, and doesn't necessarily portend trouble for the bank’s entire loan book, the bank said. The $151 million reserve boost in consumer loans was specifically for credit cards and overall loan growth. The $161 million commercial loan reserve increase was to cover loans to specific clients that had been recently downgraded by industry analysts.

“We do not expect signs of deterioration in our portfolio,” Chief Financial Officer Marianne Lake said during the conference call. “The outlook for credit, as we see it, remains positive.”

It makes sense for JPMorgan to increase reserves now because its loan book has grown faster than other banks in recent years, Rumohr said. The move also suggests that Dimon meant it when he said the bank will pull back in loan categories that are showing signs of risk, such as auto and commercial real estate lending.

“You’ve seen their auto book decline, and they’ve talked about tightening in CRE,” Rumohr said. “They are willing to let various loan books decline if they’re not seeing the return metrics they want.”

Despite the worries about the future, JPMorgan’s fourth-quarter results showed that there are reasons to be optimistic. Wholesale loans, a category that includes commercial and industrial loans, rose 11% to $454.2 billion from a year earlier. Credit card loans increased 5% to $156.6 billion.

Higher interest rates also helped. The net interest margin widened 12 basis points year over year to 2.54%. Average earning assets rose 56 basis points to 3.70%.

Still, Dimon warned that the good times will not last forever. He wants JPMorgan to be ready when the tide turns.

“We stay in a business knowing there’s going to be a cycle and we’re not going to be children in this cycle,” Dimon said. “We know the losses are going to go up.”

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Earnings Commercial lending Consumer lending Credit quality Loan-loss provisions Jamie Dimon Marianne Lake JPMorgan Chase