Amid Pandemic, JPMorgan Can Afford to Think Long Term

Low interest rates and a flat yield curve hurt JPMorgan’s core lending profitability more than forecast.

Photo: Kevin Hagen for The Wall Street Journal

The biggest bank in the U.S. produced a surprisingly strong quarter. But it isn’t a game changer—yet.

The factors behind JPMorgan JPM -1.62% Chase’s outperformance of analysts’ profit and revenue forecasts mostly reinforce what investors should have been expecting: People are still in the main paying their credit-card and mortgage bills. The business of Wall Street has been very solid amid a historic surge in stock sales.

Yet the gloomy backdrop still lingers. Low interest rates and a flat yield curve hurt JPMorgan’s core lending profitability more than forecast. Loan growth is very hard to come by. Washington’s future policies on capital minimums and payouts will largely constrain when, and how much, banks might be able to return to shareholders.

On credit, the quarter shouldn’t set expectations. A few reserve releases here and there helped JPMorgan substantially lower its credit costs for the quarter, far more than analysts anticipated. Analysts were expecting net charge-offs over $2 billion and a reserve build of about $600 million, according to estimates compiled by Visible Alpha; instead, JPMorgan released about $600 million of reserves and net charge-offs were $1.2 billion. But the bank didn’t signal that it sees any big turnaround in borrowers’ fortunes. Rather, it warned that substantially higher charge-offs, primarily in credit cards, won’t be felt until the back-half of next year.

Meanwhile, credit troubles were hardly absent: Total nonperforming assets did jump 18% from the second quarter. The bank attributed this in part to the roughly 10% of mortgage borrowers that have left forbearance but are still behind on their payments, plus to some particular commercial borrowers in troubled sectors such as real estate, retail, and oil and gas.

Still, there were encouraging signs that JPMorgan is positioning itself for long-term advantage. For one, despite the absence of corporate loan demand, the bank has hesitated to redirect all of its deposit geyser into securities. Though the bank’s investment-securities portfolio is far bigger than a year ago, it shrank 5% from the second quarter. Yet the bank still has some $470 billion of its own cash on deposit in banks.

This hurts JPMorgan’s interest income for now, because it isn’t earning anything on that cash. Net interest income was one disappointment relative to estimates, as was the bank’s core net interest margin. But Chief Executive James Dimon argued that locking the bank into the returns on offer in today’s securities, which are more than cash but still historically quite low, will only impair the bank when a turn comes in the economic cycle. “We don’t want to be in a position where…we’ll lose a lot if rates go up,” he told analysts. Likewise, JPMorgan is also physically aiming to be there when borrowers return, with plans to open branches in 10 new states, expanding to the entire lower 48 states.

Not every lender can afford to play such a long game, because they won’t have JPMorgan’s 15% return on common equity this quarter. But from JPMorgan’s point of view, it is still only the early innings.

Stocks are booming while companies shed millions of workers from payrolls. WSJ explains why the stock market seems disconnected from economic reality in the U.S. Photo Illustration by Carlos Waters/WSJ

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Appeared in the October 14, 2020, print edition as ‘JPMorgan Plays Long Game.’