Is your bank safe? – A look at JPMorgan

Over the past few months, we’ve written several articles outlining our view of banks in general, explains Avi Gilburt from

We have explained that the relationship that you, as a depositor, have with your bank is consistent with a debtor/creditor relationship. This puts you in a precarious position if the bank encounters financial or liquidity problems. Plus, we’ve also explained why going to the FDIC might not be entirely advisable. And, finally, we explained that the next time there is a financial meltdown, your deposits could be turned into equity to help the bank reorganize.

So ultimately it is up to you as a depositor to seek out the strongest banks you can find and avoid banks with questionable stability.

Although we have described in our last articles the potential pitfalls that we foresee concerning various banks for the foreseeable future, we have not provided you with a deeper understanding of why we consider the large banks to be of questionable stability. Over the next few months, we intend to publish articles outlining our views on this issue.

First, we want to explain the process by which we examine the stability of a bank.

We focus on four main categories that are crucial to the operational performance of any bank. These are balance sheet strength; margins and profitability; Asset quality; Capital and profitability. Each of these four categories is divided into five sub-categories, and then a score ranging from one to five is assigned for each of these 20 sub-categories:

If a bank looks significantly better than the subcategory’s peer group, it receives a score of five.

If a bank appears better than the peer group in the subcategory, it receives a score of four.

If a bank matches the subcategory’s peer group, it receives a score of three.

If a bank appears worse than the peer group in the subcategory, it receives a score of two.

If a bank appears significantly worse than the peer group in the subcategory, it receives a score of one.

Then we add up all the scores to get our total score. To make our analysis objective and straightforward, all scores are weighted equally. Accordingly, an ideal bank scores 100 points, an average 60 points and a bad one 20 points.

There are also certain “access control” issues that a bank must overcome before we even notice that particular bank. Many banks have ‘red flags’, which makes us reluctant to even consider them in our ranking system.

As mentioned earlier, it is difficult to overestimate the importance of further analysis when it comes to choosing a truly solid and safe bank. There are many red flags that many retail depositors may not pay attention to, especially in a stable market environment. However, these red flags are likely to cause major problems in a volatile environment. Below we highlight some of the key issues we are currently seeing when we take a closer look JP Morgan (JPM).

In our opinion, JPMorgan is one of America’s best megabanks. It is a well-run institution and its operations and general fundamentals have improved considerably over the past ten years. However, even this high-quality franchise has a lot of red flags, which we believe could lead to major problems for depositors in a bear market. As such, we believe JPMorgan clients should be aware of these red flags, which often go unnoticed in a rising or even stagnating economy.

Closer examination of loan portfolio reveals significant exposure to credit cards

If we look at JPM’s overall earnings release, we’ll see that its lending portfolio looks quite conservative, with credit cards making up only around 14% of the bank’s total credit portfolio at the end of 2021. This seems particularly good compared to the respective sharing of Citigroup, Inc. (VS), which was 56% at the end of the same period.

Source: company data

However, a closer look at JPM’s Form 10-K reveals a different picture. As shown in the table below, the bank also has lending commitments, which bring total credit card exposure to $885 billion, well above the $143 billion, as reported in the release. hurry. By comparison, residential real estate loans were $225 billion.

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Source: company data

Importantly, these credit card commitments accounted for 70% of the bank’s total loan commitments at the end of 2021. As shown below, JPM’s total credit portfolio is 2.457 billion dollars, suggesting that the credit card share is 36%, much higher. by 14%, as stated in the bank’s press release. Adding in other consumer loans, JPM has $1.208 billion in non-mortgage retail loans, which is 49% of the bank’s total credit portfolio. This implies that JPM’s loan portfolio has a less secure risk profile compared to what is stated in the main press release.

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Source: company data

AFS and HTM Securities Books seem conservative; However, trading assets and OTC derivatives are a concern

The bank’s AFS and HTM books look quite conservative, especially when compared to, say, Citi’s, which we discussed in detail in our article on Citi. There are a few non-US sovereign bonds, but their share is small.

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Source: company data

Trading assets look less conservative as there is exposure to equities, which stood at around $100 billion at the end of 2021.

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Source: company data

The biggest concern is a fairly large share of over-the-counter (OTC) derivatives.

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Source: company data

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Source: company data

As a reminder, we would again like to highlight a note on the difference between OTC, cleared and exchanged derivatives, which Citigroup made in its 10-K, as it is also relevant to JPM:
Source: “Over-the-counter (OTC) derivatives are derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. Cleared derivatives include derivatives executed bilaterally with a counterparty in the market over-the-counter but then transferred to a central clearinghouse, with the central clearinghouse becoming the counterparty to the two initial counterparties Exchange-traded derivatives include derivatives executed directly on an organized exchange that provides price transparency prior to trade .

Not surprisingly, over-the-counter contracts are the riskiest type of derivatives, especially in a recessionary environment where the risk of counterparty default is high.

2022 Fed stress tests suggest potential capital loss of $41 billion

In June, the Fed released stress test results for 33 US banks. As shown below, in the very adverse scenario, JPM recorded a net loss of $40.9 billion, or nearly 20% of its CET1 capital as of YE2021. As we noted earlier in our article on Citi, the Fed’s assumptions for its severe adverse scenario are quite moderate, in our view. In particular, the Fed assumed a relatively short-lived market correction and a V-shaped recovery in markets and the global economy. As such, it might come as a surprise to many depositors that even a bank as strong as JPM would lose close to 20% of its capital even in a mild recession.

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Source: The Fed

The essential

Unlike JPM, the top 15 U.S. banks we identified on have a mix of low-risk lending with minimal exposure to unsecured lending and have very conservative securities portfolios, which consist primarily of Treasuries. U.S. and U.S. municipal bonds, and have no derivative instruments either on or off balance sheet. Additionally, JPM has more red flags, which we have not discussed in detail due to the limitations of the article, such as increased RWAs (risk-weighted assets) in a volatile environment, revenue compression the bank’s fees and the bank’s off-balance sheet items. However, all of our Top 15 banks have been tested for these red flags to ensure their long-term stability.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.neta live trading room showcasing its analysis of the S&P 500, precious metals, oil and USD, plus a team of analysts covering a range of other markets.

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