Amid the bright spots in JPMorgan Chase’s second-quarter earnings report – including higher consumer spending and record revenue in asset and wealth management– there lingers a pesky headwind that could persist for several months.
Payment rates on credit cards, which have been higher than normal during the pandemic, could stay elevated through the end of the year, executives at the $ 3.7 trillion-asset bank warned Tuesday. If cash-flush consumers keep paying off their balances at unusually fast rates, loan growth will remain muted, even though card spending has been rising.
As long as an unusually low percentage of credit card spending gets converted into revolving balances, JPMorgan’s net interest income will suffer, JPMorgan Chief Financial Officer Jeremy Barnum noted during a call with analysts Tuesday. In June, the nation’s largest bank by assets reduced its 2021 net interest income guidance from $ 55 billion to $ 52.5 billion.
Barnum said that JPMorgan expects US consumers to start taking on more leverage, but added: “We just don’t think it’s likely to be a meaningful effect this year.”
JPMorgan, which kicked off bank earnings season Tuesday, could be a bellwether for other big banks that rely heavily on credit card income, since the higher-than-normal payment rate has been a phenomenon across the US credit card industry.
During the pandemic, government stimulus checks, muted consumer spending and forbearance on mortgages and other loans have given US households more cash to pay down credit card bills.
Even as vaccination rates rose and consumer spending ticked upward during the first quarter of 2021, card balances declined by $ 49 billion, which marked the second largest decrease on record, according to a report from the Federal Reserve Bank of New York.
Just how long the trend will continue remains to be seen – and depends in large part on ongoing stimulus efforts. On Thursday, the federal government is set to begin making child credit tax payments of $ 300 per month per child to eligible families, a move that will theoretically give an additional boost to many households’ finances.
Like most banks, JPMorgan remains flush with deposits. In the second quarter, its average deposits surged by 23% compared to the year-ago quarter and rose by 4% from the first quarter.
JPMorgan reported net income of $ 11.9 billion, down 16% from the prior quarter, but up 155% from the year-ago period, when the company stashed away $ 8.9 billion in credit reserves to prepare for potential bad loans.
JPMorgan’s net interest income was down 1% from March 31, negatively impacted by relatively flat loan demand and lower interest rates. But the pace of decline moderated in the second quarter, analysts at DBRS Morningstar noted.
Barnum, who led his first earnings call since being promoted to the CFO role in May, said that exceptionally low net charge-offs across the bank are offsetting some of the headwinds to higher net interest income.
In the second quarter, JPMorgan’s net charge-offs totaled $ 734 million, which was half of the total reported in the second quarter of 2020.
Sales volumes on debit and credit cards totaled $ 444.3 billion in the second quarter, which was up 19% from the first quarter, and up 45% from the year-ago period, when much of the country was locked down during the pandemic’s early months.
Credit card loans at the bank grew by 7% between March 31 and June 30, but were basically flat in comparison with the second quarter of 2020, the company said. Overall, loans grew just 1% in comparison with the first quarter and were flat compared to the second quarter of last year.
During Tuesday’s conference call, analyst Steven Chubak at Wolfe Research asked if JPMorgan might see a tailwind to net interest income if card payments rates return to more normal levels.
That’s unlikely to happen anytime soon, Barnum warned, though he said there could be a tiny increase between the third and fourth quarters. “I think you want to be thinking about that as a 2022 effect,” he said.