The economic havoc wrought by the coronavirus could result in steep declines in lenders’ revenues, huge loan losses, and big dents to capital levels this year, according to a stark warning from the boss of Wall Street’s largest and most profitable bank.
In his annual letter to shareholders on Monday, JPMorgan (JPM) chairman and chief executive Jamie Dimon outlined two scenarios internally modelled by the bank.
The first, based on capital reviews submitted to regulators in 2019, assumes US unemployment peaking at 10 per cent and the stock market falling by 50 per cent. While the bank would remain profitable throughout this scenario, it would expect revenue to decline by almost a fifth and credit costs to climb to $20bn (£16.3bn).
“We don't know exactly what the future will hold – but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” wrote Mr Dimon. “Our bank cannot be immune to the effects of this kind of stress.”
A more severe scenario – which analysts at Morgan Stanley and Goldman Sachs expect – assumes a 35 per cent drop in gross domestic product in the second quarter, and a steady drop in unemployment to 14 per cent by the end of the year. If this happened, JPMorgan estimates its common equity tier one ratio – regulators’ key measure of banks' balance sheet resilience – could drop to 9.5 per cent, down almost a quarter on December 2019.
Mr Dimon added that in this extreme scenario, the bank would be likely to consider suspending its dividend. So far, larger US lenders have remained firmly committed to shareholder distributions, despite suspending their share buyback programmes.
