By Noor Zainab Hussain and David Henry
(Reuters) -JPMorgan Chase & Co’s Chief Executive Jamie Dimon warned of economic uncertainties arising from Russia’s invasion of Ukraine and soaring inflation, after first-quarter profits at the largest U.S. bank slumped 42%.
JPMorgan had reported record profit during the first quarter last year, benefiting from a dealmaking boom after the Federal Reserve pumped liquidity into capital markets to mitigate the economic impact of the COVID-19 pandemic.
This year, however, investment banking revenues declined as companies delayed takeovers and stock market listings amid a surge of volatility in equity markets. The bank also set aside $902 million to cover potential loan losses.
JPMorgan is seen as a bellwether for the U.S. economy and its lackluster results set the tone for first-quarter earnings from Wall Street banks as the Fed looks to rein in inflation and the trading bonanza banks enjoyed during the pandemic tapers off.
“Inflation and Ukraine are powerful forces that threaten the economy,” Dimon said on a call with media, underscoring a change in his bullish outlook for the U.S. economy.
“The Fed needs to try to manage this economy and try to get to a soft landing, if possible.”
Pressed on whether the U.S. could face a recession, Dimon said: “I am not predicting a recession. Is it possible? Absolutely.”
JPMorgan shares were down 2.8% in afternoon trading. Other bank stocks also fell. Citigroup and Bank of America were both down 0.9%.
JPMorgan’s Common Equity Tier 1 (CET1) ratio, a key measure of financial strength, fell to 11.9% from 13.1% in December. That could hamper its ability to buy back shares, analysts said.
The bank will buy back less stock this year than in 2021, Chief Financial Officer Jeremy Barnum told analysts.
Questioned by analysts about the broader outlook for the current year, Dimon said there were “storm clouds on the horizon,” including the war in Ukraine, which Russia calls a “special military operation.”
“Usually wars don’t necessarily affect the global economy in the short run. But there are exceptions to that. This may very well be one of them,” he said.
Dimon’s tone on the economy was less optimistic than in the past and that weighed on the stock, said Christopher Marinac, research director at Janney Montgomery Scott.
“Jamie is one of those people who will tell you what you need to hear, not necessarily what you want to hear,” he said. “A lot of people want to hear that everything is fine and he’s not telling you that.”
Trading was better than anticipated, analysts said, but still down 3% on a record quarter last year.
Dimon warned of increased volatility ahead, which bankers have said could be good for Wall Street trading desks.
“There is almost no chance you won’t have volatile markets, that can be good or bad. But I think people should be prepared for that,” he said.
JPMorgan reported a 28% drop in investment banking revenue for the first quarter, dragging net revenue down 5% to $30.72 billion. The fall also reflected markdowns related to Russia-linked derivatives.
Investment banking fees plunged 32% to $2.01 billion, driven by a 69% decline in equity underwriting fees. The number of deals where JPMorgan acted as a bookrunner declined 39% compared with last year.
UP AGAINST INFLATION
The big U.S. banks are reporting results at a time of surging inflation, which could lead the Fed to hike interest rates more aggressively this year.
While that can benefit big lenders by increasing what they earn from loans, rapid rate hikes could slow the economy and scupper a nascent recovery from the pandemic.
Net interest income from JPMorgan’s core banking businesses, excluding the markets business, increased 9% from a year earlier. That figure is expected to be more than $53 billion for 2022, the bank said, roughly in line with its February guidance.
JPMorgan reiterated its full-year expenses would increase nearly 10%.
Markets revenue came in stronger than had some had feared, falling 3% to $8.8 billion, with fixed income trading down only 1% compared to exceptionally strong levels last year.
Other large U.S. banks including Citigroup and Goldman Sachs will report results on Thursday.
(Additional reporting by Niket Nishant and Sweta Singh in Bengaluru; Writing by Matt Scuffham; Editing by Saumyadeb Chakrabarty and Nick Zieminski)