JPMorgan Chase: Recession Coming But Banks Are In Pretty Good Shape

JPMorgan Chase & Co. (JPM) has set aside $1.4 billion for possible loan losses in the near future.

A recession is a real possibility, stated JPMorgan boss Jamie Dimon, but, “We don’t know the future.”

“There are geopolitical uncertainties which are real, and we have our eyes focused on it.

They may go away or they may not.”

Well, that is not very helpful.

But, it is a result of the radical uncertainty that pervades the financial markets these days.

And, with JPMorgan leading the discussion, it is apparent that the commercial banking system is getting itself ready for a possible shock.

All the large commercial banks are increasing their loan loss reserves.

How Are The Banks Doing?

Again, JPMorgan is leading the pack.

In 2022, JPMorgan Chase earned 14 percent on its common equity.

That is down from their 2021 figure of 19 percent, but almost any bank would gladly earn only 14 percent on its equity.

The traditional target goal is to earn 15 percent on equity. This return provides what analysts refer to as a sustainable capital return.

That is, economists believe that earning a return this high means that the corporation, in this case, JPMorgan Chase, can maintain its market position going on into the future. It is a sign of financial strength.

The major weakness experienced in 2022, according to JPMorgan, was in the area of investment banking. The dealmaking slowdown was captured in the JPMorgan data, with a 58 percent slide in investment banking revenue.

This drop was consistent with the results presented by other large domestically chartered banks.

So, the banks are in general still putting up good numbers.

The thing that really shows up in terms of bank safety results from all the money that the Federal Reserve has pumped into the banking system.

For example, JPMorgan Chase has a Basel III common equity Tier I ratio of 13.2 percent, which is quite good.

Furthermore, JPMorgan holds lots and lots of cash and cash equivalent assets. Again, this is very similar to what other large banks have done during this time of Federal Reserve largess.

Although it is not quite like the measure on the aggregate industry, one can get the idea from these figures.

For example, according to the Federal Reserve System, commercial banks in the United States now hold 13.7 percent in cash assets.

This is a historically large number, although in December 2021, the commercial banking system held 17.9 percent of total assets in cash assets.

As far as the largest 25 domestically chartered banks in the United States, the December 2022 number is 10.3 percent, again a very large number in the historical picture.

Last year, the number for large domestically chartered banks was 14.5 percent.

In other words, the Federal Reserve, now in a period of quantitative tightening, has removed a lot of reserves from the commercial banking system.

The total of cash reserves on hand on commercial bank balance sheets at the end of December 2021 was $4, 056.4 billion.

This is very close to the number of Reserve Balances with Federal Reserve banks on the Fed’s balance sheet (Federal Reserve release H.4.1), which was $4,039.9 billion on December 29, 2021.

On December 28, 2022, the amount of Reserve Balances with Federal Reserve Banks was $2,979.7 billion.

The amount of cash assets on the balance sheets of all commercial banks in the U.S. was $3,145.5 billion, not too far away from the reserve balances number.

The point is that, in my mind, the commercial banking system has pretty well protected itself from a U.S. recession in terms of having plenty of liquidity on hand and by building up substantial capital positions.

The money the banking system is allocating toward loan loss reserves will just provide more protection in the future against even a fairly robust financial shock.

The commercial banking system has prepared itself rather well for a possible economic downturn. The Federal Reserve has, in creating the asset bubble it did in 2020 and 2021, provided banks with the means to protect themselves.

Other areas of the financial world, however, used the Fed’s cash to move into more and more speculative areas like cryptocurrencies and “blank check” companies.

These other areas of the financial sector, therefore, are not as well protected as the commercial banking system has covered itself.

Going Forward

As in other areas of the U.S. economy, the specific experience of the commercial banks have moved in a particular balance.

It looks as if the commercial banks have been pretty conservative during the last two years.

This cannot be said for other areas of the economy.

Thus, where Jamie Dimon can take on a pretty low-key response to questions about an upcoming recession and the ability of his bank to handle such a downturn, this is not the case in a lot of other areas in the economy.

So, this is what I am taking from earnings season in the commercial banking area.

The commercial banks are in relatively good shape, still producing substantial profits while maintaining a relatively strong balance sheet.

Thus, the large banks in the U.S. economy seem to be positioned to withstand a financial drop.

There are, however, very many sectors of the financial market where this confident statement cannot be made.