Government stimulus programs aimed at alleviating suffering during the coronavirus pandemic have flooded consumers with savings – boding well for the current economic recovery, JPMorgan Chase CEO Jamie Dimon said.
One of the only weaknesses in JPMorgan’s earnings report was subdued demand for loans as everyone from credit card lenders to multinational corporations paid off their debts, the bank said Wednesday.
Total loans at the bank fell 4% from a year earlier to $ 1 trillion, even as deposits at JPMorgan were up 24% to $ 2.28 trillion. While that would normally be a bearish sign in a weakening economy, in this case it only means consumers will be laden with cash as vaccines allow for a wider reopening, Dimon said during a phone call with reporters on Wednesday.
“What has happened is that the consumer has so much money that they are paying off their credit card loans, which is good,” said Dimon. “Their balance sheet is in great, great shape – rolled up, ready to use, and they’re starting to spend. Consumers have $ 2 trillion more in cash in their checking accounts than they did before Covid.”
Many Americans have received three rounds of stimulus checks and improved unemployment benefits since the start of the pandemic, helping to avoid a wave of defaults expected last year. They’ve saved about 30% of their incentive checks from each round, and recently they’ve put more money into debt repayments, said CFO Jennifer Piepszak.
Consumer spending on debit and credit cards has returned to pre-pandemic levels despite lower spending on travel and entertainment, Piepszak said. Those categories should recover as more people are vaccinated, helping a general recovery in loan demand in the second half of 2021, she said.
The government stimulus, along with the improvement in employment and the advent of vaccines early this year, were cited as reasons why banks have begun to release some of the tens of billions of dollars in credit loss reserves they set aside last year . JPMorgan released $ 5.2 billion in reserves in the first quarter, the biggest sign to date that the US banking sector now expects to have fewer credit losses than feared.
Something similar happened for companies, Dimon said. Large companies were able to stop bank loans after raising money in the equity or fixed income markets, while smaller companies benefited from the government’s Paycheck Protection Program.
“We think [companies] “Having $ 2 trillion in surplus money on the balance sheet,” said Dimon. “If they raise money in public markets, they can pay off loans to banks. This is not bad news about the demand for loans, this is actually good news.”
According to Mike Mayo, an experienced banking analyst at Wells Fargo, JPMorgan was able to withdraw about 20% of all new deposits that came into banks in the past year. However, that in some ways has made it a victim of its own success.
The influx of deposits – without places to put them – is straining JPMorgan’s efforts to stay within its international regulatory constraints. The company is nearing leverage limits as temporary Federal Reserve exemptions expire, managers warned, forcing the bank to raise more capital.
“When a bank has limited leverage, it lowers the marginal value of a deposit,” Piepszak told analysts in a conference call. “Regulators should consider whether requiring banks to hold additional capital for further deposit growth is the right outcome.”
Due to the dynamics, JPMorgan’s loan to deposit ratio fell to 44% in the first quarter from 57% a year ago.
“There is definitely a conundrum at JPMorgan,” said Mayo. “To build a franchise to collect deposits and not be able to fully realize the value of those deposits is not optimal.”
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