The challenges that are faced by the big banks in the current phase of pandemic were laid bare by the first quarter results of JPMorgan Chase & Co. The issue for the big banks is that the stimulus programs have helped individuals and businesses to achieve good financial shape but they have enough cash at hand now and they do not need loans.
The expectations of the Wall Street were also easily surpassed by the largest bank of the United States as it reported a 400 per cent growth in profits for the quarter. A large portion of the gains for the bank was because of the more than $5 billion that the bank had set aside as a cover for possible loan losses that the bank feared could happen because of the Covfid-19 pandemic. However such losses did not materialize. At the same time the bank also benefitted from a boom in the activities in the capital markets.
At the same time there was also shrinking of its loan book as well as the average interest it collects from loans. The current ratio of the bank in terms of loans to deposit is about 44 per cent which is about half of what the large banks want to see in their portfolio.
With individuals and businesses almost ready to begin spending and investing again even though that would mean a temporary stoppage in demand for loans, the dynamic was described as a good one by the JPMorgan Chief Executive Jamie Dimon.
“The consumer has so much money to pay down their credit card loan, which is good,” he said on a call with journalists, noting that consumers have $2 trillion more in their checking accounts than they did pre-pandemic. “Their balance sheet is in excellent, outstanding shape. Coiled, ready to go, and they are starting to spend money. That’s not the same as loan demand when the economy is weak.”
Dimon said businesses too were given help by the governments while also managing to raise a large amount of financing form markets.
“When they raise cash in the public markets they can pay down loans to banks,” he said. “This is not bad news about loan demand. This is actually good news.”
Later this year there would be a pickup in demand for loans while there would be continued growth in deposits more with the US Fed continues to expand its balance sheet, JPMorgan expects said the bank’s executives.
According to analysts, the situation for lathe banks is much better than a year ago when there was a worry among banks about widespread loan defaults happening because of the pandemic.
JPMorgan’s profit rose to $14.3 billion, or $4.50 per share, in the quarter ended March 31, from $2.9 billion, or 78 cents per share, a year earlier. Excluding the reserve releases, which the industry does not count as “core” profit, the bank’s earnings per share were about $3.31 per share, analysts said.
(Adapted from FirstPost.com)