JP Morgan Chase, the largest US bank, saw its net income fall 28% over the months of April to June as it boosted reserves to cover possible customer loan defaults amid concern over the economy and geopolitical tensions.
The investment bank’s profits for the second quarter came in at $8.65bn (£7.3bn), or $2.76 per share, far less than $11.95bn, or $3.78 per share, over the same period a year ago. Shares in the bank dropped 4.3% on Thursday, hitting a fresh 52-week low.
Its chief executive, Jamie Dimon, expressed a note of caution over the direction of the American economy as fears grow that US central bankers will intensify efforts to tackle inflation – which hit a 40-year high of 9.1% in June – with a full point rise in interest rates later this month.
“The US economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy,” he said.
“But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
Last month, Dimon warned of the approach of an economic “hurricane”. On Thursday he said he had not changed his views, but his concerns had edged closer and elements of financial dislocation had begun to show themselves.
The US federal reserve’s efforts to tame inflation could still lead to a soft or a hard landing, he said.
“Rates are rising because of inflation, and in my view they’ll go up more than people think. Quantitative tightening will reduce liquidity in global markets and stock prices are down a lot.”
JP Morgan also announced it had temporarily suspended share buybacks as it sought to meet tougher new capital requirements imposed by the Federal Reserve, the US central bank.
Bank stocks have been hit hard this year, in part because investors fear that job losses that will come as part of a recession will impact customers’ ability to repay loans.
In April, JP Morgan was one of the first banks to begin to set aside funds for loan losses. On Thursday the bank said it had set aside $428m for bad debt in the second quarter, taking its total reserve for soured loans to $1.1bn.
A survey by the International Association of Credit Portfolio Managers has indicated that credit defaults are on track to rise in North America, Europe, Asia and Australia.
“We expect much of the upcoming reporting season to represent an earnings ‘confession’ period for chief executive officers as guidance to analysts will likely be adjusted noticeably to the downside,” Wells Fargo’s senior global market strategist Scott Wren wrote in a note on Thursday.
Separately on Thursday, rival US bank Morgan Stanley revealed it had missed profit estimates for the first time in nine quarters as revenues at its investment banking unit dropped by 55%. Its shares have fallen 24% this year, and dropped a further 2.4% on Wednesday in early trading.
The poor results from the two banks came as market analysts at Citigroup foresaw an intensifying response to record inflation from US central bankers.
“We now expect the Fed to deliver a 100 basis-point rate hike at the meeting later this month,” Citigroup’s Andrew Hollenhorst wrote in a note to clients.
