Government stimulus programs aimed at reducing suffering from the coronavirus pandemic have saved consumers money – and it bodes well for economic recovery, according to Jamie Dimon, CEO of JPMorgan Chase.
One of the only weaknesses in JPMorgan’s earnings report for the first quarter was the muted loan demand, as everyone from credit card lenders to multinational corporations paid off their debts, the bank said on Wednesday.
Total bank lending fell 4% year-on-year to $ 1 trillion, even though JPMorgan’s deposits rose 24% to $ 2.28 trillion. While that would normally be a clumsy sign in a weakening economy, it only means in this case that consumers will be burdened with cash because vaccines allow for a wider reopening, Dimon said Wednesday during a call with reporters.
“What has happened is that the consumer has so much money, that he is paying off their credit card loans, which is good,” Dimon said. “Their balance sheet is in excellent, excellent shape – rolled up, ready to start and they’re starting to spend money. Consumers have $ 2 billion more cash in their checking accounts than before Covid.”
Many Americans have received three rounds of stimulus tests and enhanced unemployment benefits since the start of the pandemic, which could have prevented the wave of standards expected last year. They saved about 30% of their stimulus checks in each round and recently poured more money into debt repayment, CFO Jennifer Piepszak said.
According to Piepszak, consumer spending on debit and credit cards has returned to pre-pandemic levels, despite lower spending on travel and entertainment. These categories need to recover as more people are vaccinated, which will help an overall recovery in lending demand in the second half of 2021, she said.
The government’s stimulus, coupled with improved employment rates and the arrival of vaccines early this year, are cited as reasons why banks have started releasing some of the $ 10 billion loan loss reserves they set aside last year. JPMorgan released $ 5.2 billion in reserves in the first quarter, the biggest sign yet that the US banking industry will now expect less loan losses than it feared.
A similar thing happened to businesses, Dimon said. Large companies were able to retire bank loans after raising money in the stock or fixed income markets, while smaller companies took advantage of the government’s Paycheck protection program.
“We think [companies] has something like $ 2 billion in excess cash in balance sheets, “Dimon said. If they raise money in the public market, they can pay off loans to banks. This is not bad news about the demand for loans, it is actually good news. ‘
According to Mike Mayo, a veteran banking analyst at Wells Fargo, JPMorgan has managed to take up about 20% of all new deposits that have flowed into banks. However, in some ways it has made it a victim of its own success.
The influx of deposits – with no places to deploy them – adds pressure to JPMorgan’s efforts to stay within its international regulatory constraints. Management is approaching limits for leverage as temporary exemptions from the Federal Reserve expire, managers warned, forcing the bank to raise more capital.
“If a bank is limited to leveraged financing, it lowers the marginal value of any deposit,” Piepszak told analysts during a conference call. “Regulators need to consider whether the requirement for banks to hold extra capital for further deposit growth.”
The dynamics resulted in JPMorgan’s ratio of loans to deposits falling to 44% in the first quarter, compared to 57% a year ago.
“There’s definitely a deposit mystery at JPMorgan,” Mayo said. “Building a franchise to collect deposits and not being able to fully earn the value of those deposits is not optimal.”
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