Is JP Morgan Pessimistic Enough On Credit Cards?

Jamie Dimon spoke with an almost uncanny candor about the chargeoffs at its core Chase Card operations. The firm says losses were already at 7.7%, a huge jump from 5.6% in the first quarter. It predicted that chargeoffs will likely reach 9% to 9.5% in the second quarter. That’s a pretty pessmistic view but is it pessmisitic enough?

Dimon was blunt about what he sees as driving losses in the credit card business. When unemployment goes up, so do chargeoffs for credit cards. When house prices decline, chargeoffs go up. When both happen, it gets even worse.

This is a change from the traditional view, according to which loss rates for credit cards simply tracked unemployment. It shows that JP Morgan is now well-adjusted to the reality of falling housing prices. But just because we accept Dimon’s way of calculating losses, doesn’t mean we have to accept his outcome. Indeed, Dimon agreed with that idea on the earnings call, telling analysts to plug their own projected unemployment and housing losses directly into their projections for JP Morgan’s earnings.

So let’s do the maths. Unemployment in the first quarter averaged 8.5% and most projections think it will rise to around 10-to-10.5% per cent in the second quarter. That increase would fully account for the extra 200 basis points of charge offs that JP Morgan expects, so it appears that JP Morgan may not be expecting home prices to fall much further or may be projecting a rosier employment situation. Continued declines in housing and employment could result in much higher charge offs from the credit card business.

How much worse? Our guess is that likely charge offs would likely rise beyond 10% once the continued decline in house prices that we expect hits the returns. How far above 10% will depend on how much further house prices sink. And that’s not a number we’re going to even pretend to be able to predict.

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