JPMorgan’s $1 billion loss reserve signals pain ahead

When JPMorgan released its first-quarter results this week, the company also built up reserves of $902 million — a move that signals a tough credit environment is ahead.

Building up reserves means that loans may deteriorate, although credit quality remains strong, for now.

i2c President Jim McCarthy told PYMNTS in a Quick Take interview that FinTechs are also going to feel pain. Because, quite simply: these companies have never operated in an environment like this.

“For the FinTech community, at large, it’s going to be interesting to see how they handle these big shifts in the macro climate,” McCarthy said.

The impact may be felt most keenly by finance companies, by companies that have extended demand capitalization to buy now, pay later (BNPL). No matter where you look, the various “vintages” of loans that have been issued have not been around for that long, which of course means that the credit quality is unclear.

For JPMorgan, as reported in this space earlier in the week, the increase in reserves is a significant change from recent practices where the company released reserves into earnings. Currently, the bank’s total provision for credit losses is $1.4 billion. Charges, at least for now, appear manageable, as JPMorgan’s net credit card charge came in at 1.4%, better than the nearly 3% seen last year. Card credit outstandings continue to grow and revolving balances are above first quarter 2021 levels.

What comes next is unclear

You have to ask yourself the next question. Chief Financial Officer Jeremy Barnum noted that the reserves come because the bank “increases the likelihood of downside risks due to high inflation and the war in Ukraine.

Inflation is likely to have the biggest impact on FinTechs, especially if and perhaps when consumers are unable to meet their monthly obligations. Barnum said on the call that inflation remains an “interesting issue when you look at our customer base, particularly in cards and … the much debated issue of real income growth and gasoline prices and what what it does to consumers’ balance sheets”.

As McCarthy told PYMNTS, since we haven’t seen inflation at these levels in 40 years:

“There will be a lot of pain ahead for consumers, merchants and startups as we head into the next year or two, he told PYMNTS.

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