JPMorgan’s $1B Loss Reserve Signals Souring Loans and ‘Pain’ Ahead for FinTechs

When JPMorgan reported first-quarter earnings results this week, the company also built $902 million in reserves — a move that signals a tough credit environment is in the cards.

Building reserves means that loans may go sour, even if credit quality remains strong, for now.

i2c President Jim McCarthy told PYMNTS in a Quick Take interview that FinTechs are going to feel pain, too. Because, simply put: Those firms have never operated in an environment like this one.

“For the FinTech community, writ large, it’s going to be interesting to see how they manage these big changes in the macro-economic climate,” said McCarthy.

The impact may be felt most keenly by funding businesses, by the firms that have been extending capitalizing on demand for buy now, pay later offerings (BNPL). No matter where you look, the different “vintages” of loans that have been extended have not been around for all that long, which means, of course, that credit quality is unclear.

For JPMorgan, as noted in this space earlier in the week, boosting the reserves is a significant change from recent practices where the company had been releasing reserves into earnings. As it stands now, the bank’s total provision for credit losses stands at $1.4 billion. Charge-offs, at least for now, seem manageable, as the credit card net charge off recorded by JPMorgan stood at 1.4%, better than the nearly 3% seen last year. Card outstanding loans continue to grow, and revolving balances were above first quarter 2021 levels.

What Comes Next is Unclear

The question must be asked as to what comes next. CFO Jeremy Barnum noted that the reserves come because the bank is “increasing the probability of downside risks due to high inflation and the war in Ukraine.

It is inflation that will likely have the most significant impact on the FinTechs, especially if and perhaps when consumers are unable to meet their monthly obligations. Barnum said on the call that inflation remains an “interesting question as you look across our customer base, particularly in cards and … the heavily debated question of real income growth and gas prices and what’s that doing to consumer balance sheets.”

As McCarthy told PYMNTS, as we have not seen inflation at these levels for 40 years:

“There will be a lot of pain ahead for consumers, for merchants and startups as we head into the next year or two,” he told PYMNTS.