JPMorgan Chase Falls 5% as Consumer Cracking Begins to Show

Key Points

• JPMorgan Chase had a solid quarter, but cracks are showing in the consumer, and NII is expected to be weak this year compared to forecasts.
• Consumer card charge-offs nearly doubled, causing a net build in consumer credit loss reserves.
• The Tier-1 capital ratio is industry-leading and above requirement, leaving JPM in solid shape to weather the storm. 

JPMorgan Chase & Company’s NYSE: JPM firmwide metrics are good, but details within the consumer business show the impact of tighter credit, pinched wallets, and the first cracks in the consumer outlook. The company’s tier 1 ratio and balance sheet are sound; JPMorgan reports more than $500 billion in loss-absorbing capacity, so it can weather the storm when it arrives. 

However, the net credit reserve release is overshadowed by a build-up in consumer credit loss reserves and credit charge-offs nearly doubling. There is no reason to believe conditions will change soon; cracks in the consumer are sure to grow and impact the entire banking sector.

Jamie Dimon Says The Market Isn’t Pricing in Enough Risk

The FOMC indicated a rate cut is likely this summer, but that outlook is rapidly deteriorating. The March CPI shows persistently high inflation and acceleration at the headline level, sure to appear in the PCE report. With only one meeting between now and the pivotal June meeting, there is insufficient time for economic conditions to cool enough for a cut without a significant change in activity. Because labor markets remain resilient and oil prices are rising, inflation will likely persist at high levels through the summer and keep the FOMC from cutting as soon and as quickly as the market is pricing. 

That aligns with comments made by JPM CEO Jamie Dimon just days before the release. Mr. Dimon, in the annual letter to JPMorgan Chase & Company shareholders, issued an economic warning. In it, he calls out the government for underpinning economic strength, points to consumers spending without worry about the future, sticky inflation, geopolitics, and Basel III (which is yet to be fully implemented). His message is that the odds for a soft landing are well below the 70-80% priced in by the market, and market volatility lies ahead. 

JPMorgan Chase Has Solid Quarter: Shares Fall 5%, A Good Time to Buy

JPMorgan had a solid quarter with ongoing business growth, amplified by the addition of First Republic assets. The company reported $41.93 billion in net revenue for a gain of 95% YOY that beat consensus by 60 basis points. AUM management grew by 19%, average loans are up 3% adjusted, 16% including First Republic, and deposits are up 2%. 

Margin and earrings are also solid. NII fell 4% sequentially but less than expected to help drive a 6% increase in net income. Net income is up 44% sequentially and expected to remain strong, although normalization in rates is expected to continue. The salient point is that the company’s fortress balance sheet is in as good a shape as ever, and the 15% Tier 1 capital ratio is well above requirements. 

Cash flow and the balance sheet allow for substantial capital returns, and increases may be expected this year. The dividend is worth about 2.4%, with the share price correction and reliable given the business health and government oversight. Repurchases in Q1 are worth $2 billion and about 35% of the net income, including distributions. 

JPMorgan Chase Stock Price Returns to Fair Value

JPMorgan’s stock price has been supported and led higher by analysts for the last year. The caveat is that the price action outran consensus and traded above the average target before the release. The 5% post-release correction was enough to return the market to the analyst's fair-value target and spark early buying. If buying continues into the open session, the stock will likely rebound strongly and increase in value this year. 

However, the price action in JPM stock is now below the 30-day moving average and may not be able to recover quickly. The market is also 10% above the 150-day moving average, suggesting potential for a double-digit correction. If this market fails to recover quickly the odds of a significant correction will grow daily.