In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, October 14, 2009

JPMorgan Conference Call

by Calculated Risk on 10/14/2009 10:10:00 AM

Update: see bottom of post for Q&A.

"While we seeing some initial signs of consumer credit stability, we are not certain that this trend will continue."
JPMorgan CEO Jamie Dimon, Oct 14, 2009

A few excerpts (ht Brian):


“We continue to see initial signs of stability in the consumer, early bucket delinquency trends, but we are not ready to declare that's a sustained trend but it is continuing to be what we actually observe. Another overall comment is that as far as the impact of foreclosures moratorium, the trial mods which have been very active in doing, and just the overall extension of processing of REO through the courts, those things are obviously having an affect on overall delinquency and stats but we are doing everything we can to stay on top of the income statement taking recognizing losses through charge offs and adding to reserves without regard for the impact that those factors would be causing in the overall delinquency.

Looking ahead to what we see, we are not changing any of these numbers [loss estimatse by loan category] and obviously whether we advance to these levels is going to be a function of whether some of the early bucket delinquency trends that we described continue or not. But we measure impairment at sub portfolio levels for purposes of accounting impairments, and so as we look at the prime portfolio, not option arms just the prime mortgage portfolio, we see some weakness. We obviously measure that in terms of expected lifetime losses on that portfolio, and have added $1.1 billion, that is put on the books in the form of a loan loss reserve as opposed to an incremental mark.
Brian notes that these comments about prime loans relate to the purchased WaMu portfolio, and that this charge is over and above the $30B write down they took at the time of the acquisition.

JPMorgan Credit Cards This table on Card Services (Managed) is from the JPMorgan investor presentation.

Click on table for larger image in new window.

The net charge-off rate rose to 9.41% in Q3, and JPM expects charge offs to hit 11% on the non-Wamu portfolio in Q1, Wamu losses could approach 24%!

Credit card losses tend to track unemployment, so the charge-off rate will probably stay elevated for some time.

Update from the Q&A:

Analyst: Loans were down about 5% linked quarter 16% year-over-year. Is that supply or demand, what are some of the ins and outs there?

JPM: Consumer portfolios, you have run off portfolios from Washington mutual and in retail, some tightening of underwriting standards in those businesses generally. So expect that at the origination levels, that for a period of time here, we are going to have downward pressure on those balances. We're in the business of making loans against our underwriting standards today. So it is active supply, meeting demand on that score. On the commercial side, you have seen it a little further down this quarter, and that is you know more, it is a little bit of everything but it is more demand clearly because we see extended credit lines utilized at the lowest levels of all time. You can see a swing in those numbers as soon as confidence returns in our commercial clients and they have some use for that money.

On the housing market:

Analyst: Would you comment on California housing market?

JPM: In the major MSAs you have seen a stabilization in fact an increase in the last couple of months, call it stabilization of home prices. That was more true for lower priced than higher priced but also happens in places where price is down dramatically, and obviously parts of Florida are still bad, parts of California we are seeing some improvement. We see that improvement in areas with a high percent of sales from forecloses and also in areas where foreclosure sales aren't as high of a percent. So I would agree with you there's a lot of distortion in that number but all things being equal it is a good fact not a bad fact.

Comment on delinquency trends and the denominator effect:

Analyst: I was hoping just to flush out some comments with respect to delinquency trends in home lending, can you talk to stabilization on Slide 17 on, in the slide deck, it looks like all of those lines are going up and it can be the discrepancy between percentage, delinquencies, come down maybe you can talk to that

JPM: Clearly on the overall 30 plus you get the distortion. I won't try to take that number down too much. You see those, in percentage terms on 17 you do see those affects rolling through. On a dollar basis it is stabilization that we are seeing across those portfolios and again it is portfolios [denominator] coming down.

On the economy

Analyst: As we look at the overall numbers they can be confusing as to the economic outlook but as you get the data kind of first-hand from people that are running the businesses that are dealing with small business, mid size and consumer, what does it tell you about the economic outlook?

JPM: You actually all see pretty much what we see, and there seems to be in the environment, in terms of consumer spending, confidence, in terms of delinquencies a little bit of improvement, and in home price. Those are actual data, and you know that can be forming the base of a recovery or not but we are not going to spend a lot of time guessing about that. The only thing anecdotally is that business, small business, middle market, large corporate, they kind of poised and waiting to see if the recovery is taking hold, they have growth plans, to me it would be a good sign if that's true because maybe, you know, people get a little more comfortable taking risks and making more investments in the future.”

On mortgage mods

Analyst: The mortgage mod, can you tell us has the process smoothed at this point? What the pipeline looks like and how long do you think its going be to get that pipeline fulfilled.

JPM: Growing pains in these processes. So we have been active. One thing it is just still early to see how effective people are in making their payments which is obviously one important thing but the other issue there is just people complying with all of the terms of what is required under the Governments guidelines in terms of amount, types of documentation before it can be declared [permanent]. So there's still I would call it growing pains in the process a little early to say it has stabilized and worked through. A lot of energy going into it adding a lot of people to it, ourselves and across the industry.

Analyst: Do you see this as something that's going to be permanent in the business, is this a pressure that will go away or is this something you guys have to live with to some degree or another permanently?

JPM (Dimon): The right way to look at it is it is so large the problem in housing today we certainly hope there’s nothing like this ever again. We have always had work out the department, the REO department, and it is just a prime delinquency that is ten times what you would have are expected, ten times expect in almost any environment. So it will come down to a much more normal thing eventually and you will have delinquency and charge offs and foreclosure that are just much smaller than they are today. It will never be this, probably never be this big again in our lifetime.