Consumer Losses to Hit JPMorgan - Analyst Blog

Although the worst of the financial crisis is probably behind us, the second-largest US-based bank, JPMorgan Chase & Co. (JPM) still expects to incur further losses in the forthcoming fiscals owing to credit card services and consumer lending. At current levels, management expects the bank’s home lending portfolio to contract by about $240 billion in 2010 and about $200 billion in 2011. 

This is expected to shrink net interest income by $1 billion in 2010. Incidentally, the long-term unemployment rate being currently pegged at around 10% and the deteriorating credit quality indicate apprehensive signs of recovery in the bank’s loan portfolios in the forthcoming quarters. 

Management expects losses on its Chase portfolio of credit cards to reach 11% by the first quarter of 2010, while losses on the Washington Mutual card portfolio could rise to 24% over the next several quarters. Higher consumer losses remain inevitable, given the current state of economy, which is still in the recovery mode. 

However, we believe that continued growth synergies from investment banking, commercial banking, treasury and security services and asset management segments will help the bank offset the credit card and consumer lending losses. 

Also, JPMorgan’s full repayment of $25 billion bailout money in the first half of 2009 puts it in an advantageous position compared to its peers like Bank of America Corporation (BAC) and Citigroup Inc (C). Following the repayment, the company has also extricated itself from government clutches. 

Additionally, JPMorgan’s large-scale acquisitions such as the Bear Stearns Companies in May 2008, diversification of business operations in various fields and a strong loan loss reserve (double the industry average) can help provide buoyancy to earnings growth, thereby bolstering the relative capital position of the bank. 

Therefore, given the positive performance potential across most of its business operations that could offset the consumer losses, we believe JPMorgan can relatively sail through in the current unstable economy. As a result, we recommend a Neutral rating on the stock.
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