JPMorgan Chase (JPM -3.00%)The largest U.S. bank by assets and a top credit rating agency expects loan losses to rise sharply this year as it recovers ‘in the quality of debt in traditional ways.
For most of the past three years, consumers have had large savings boosted by federal stimulus payments and as a result have reduced spending as people seek to prevent the spread of COVID- 19. But when the cost of living went up this year and people’s savings were pulled down, it appeared that the money of consumers was weak.
In 2023, JPMorgan expects this trend to continue, although it does not see the high quality of credit in potentially threatening situations. This is the reason.
Bad loans are still low
Credit card loans tend to have higher losses than most other types of loans because if the customer faces financial problems and has trouble paying their bills, most of them six on their credit cards.
It is not uncommon – even in times of economic health – to see credit card losses at 3% or more of unpaid loans, although this varies. bank to bank and it depends on the combination of customers.
JPMorgan Chase ended the year with a bad debt payment ratio, which looks at bad debt and is a good indicator of bad loans, at just 1.47%. That number came in below the administration’s expectations for 2022.
That’s an all-time low and seems unsustainable, especially when Americans are spending and borrowing less.
The Chief Financial Officer of JPMorgan Chase, Jeremy Barnum, on the bank’s fourth quarter, said that the bank expects “buying money” for low-income customers to reach the first level the disease in the second half of the year. He also said that card balances shown in Q4 were up 19% year over year and have returned to pre-epidemic levels. All these things support the concept of debt classification.
But it will take a while before the loan balance becomes paid off, a process that usually starts when an account has been delinquent for at least 90 days. JPMorgan expects debt payments to climb from 1.47% of total loans at the end of 2022 to 2.6% at the end of 2023, which represents a 113 percent jump.
But in 2020 JPMorgan’s credit card charge-off rate at bank is 2.93% and will be more in 2019 at 3.10%, so the health of 2.6% of credit card losses will remain.
A few thoughts
When you hear these numbers, understand that management has calculated them based on many assumptions.
Meanwhile, JPMorgan Chase’s central issue is showing a soft recession in 2023 where unemployment will peak at 5%. If the game doesn’t end, the year could end better or worse at the bank’s end. Analysts have never seen interest rates rise as quickly or as much as they did in 2022, so there are still many unknowns.
I also found it interesting in the rate of interest income of the bank, the management hopes to see again the two interest rate hike by the Federal Reserve followed by two rate cuts later this year. That would leave the Fed’s lending rate, the federal funds rate, unchanged from today. The federal funds rate affects borrowing costs, which flow into payments, so the bottom line is the key.
After all, managers tend to try to be conservative and few are more experienced than JPMorgan Chase’s, so the 2.6% estimate seems like a good goal, despite everything that isn’t. know. If this model pans out I believe JPMorgan stock will do well.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz he has no position in any of the shares mentioned. The Motley Fool has insider options and recommends JPMorgan Chase. The Motley Fool has the notification system.