By Anirban Sen, Elizabeth Dilts Marshall and David Henry
(Reuters) – JPMorgan Chase & Co’s profit plunged by more than two-thirds in the first quarter as the largest U.S. bank put aside nearly $7 billion in reserves to protect it from a wave of potential loan defaults in the months ahead.
Chief Executive Officer Jamie Dimon, who warned shareholders last week that the coronavirus crisis would hurt profits meaningfully this year, said the economy was facing a “fairly severe” recession.
The bank now has a total of $8.3 billion set aside to cover loans that may go bust in the aftermath of the virtual shutdown of huge swathes of the United States and other economies.
A new accounting rule requires banks to take provisions now if a borrower may default at any point during the agreement, even if that is months or years away.
The reserves included $4.5 billion against potential consumer loan defaults as millions of Americans lose their jobs and struggle to make payments on anything from iPhones to cars to new microwaves.
“Given the likelihood of a fairly severe recession, it was necessary to build credit reserves,” Dimon said.
The pandemic has shut down businesses, put 16 million people out of work in the United States alone and is expected to cause a global recession not seen in generations.
The biggest bank in America and a huge global player, JPMorgan’s results launch a week of financial earnings on Wall Street that are closely watched by investors and show how much central-bank policies are affecting income and how well banks are placed for the months to come.
Commentary from Dimon on calls with journalists and analysts later in the day will also be important. The 64-year-old CEO has become something of a spokesman for Corporate America and just returned to his job after emergency heart surgery in early March.
The bank’s net interest income stayed flat at $14.5 billion as lower interest rates were offset by higher net interest income from its investment banking business. It forecast annual net interest income of $55.5 billion and another rise in net reserves in the second quarter.
The bank’s net income fell to $2.87 billion, or 78 cents per share, in the quarter ended March 31, compared with $9.18 billion, or $2.65 per share, a year earlier.
Analysts on average had expected $1.84 per share, according to Refinitiv. It was not immediately clear if the reported numbers were comparable with estimates.
One month ago, analysts had estimated that JPMorgan would make $2.74 per share, according to Refinitiv data. The additional reserves, largely as a result of COVID-19, reduced results by $1.66 per share, JPMorgan said.
“This portrays the difficulty banks are going to have on (predicting) credit,” Peter Kraus, Chairman and CEO of Aperture Investors and a JPMorgan investor, said on CNBC. “It’s very hard to ascertain what your losses are in this period.”
Wells Fargo also reported a plunge in first-quarter profit on Tuesday. Bank of America Corp, Citigroup Inc and Goldman Sachs Group Inc will report results on Wednesday and Morgan Stanley on Thursday.
Derivatives positions in JPMorgan’s investment bank were impacted by a widening of funding costs, reducing results by $951 million. The bank also took an $896-million markdown on bridge loans held by its corporate and investment bank and commercial bank divisions. These included held-for-sale positions and some unfunded commitments.
There have so far been more than 1.8 million reported cases of COVID-19, the deadly respiratory disease stemming from the virus, and 115,242 deaths, according to a Reuters tally.
Reporting by Anirban Sen in Bangalore and Elizabeth Dilts-Marshall and David Henry in New York; Editing by Saumyadeb Chakrabarty and Lauren Tara LaCapra.