JPMorgan Chase has pushed more than $130bn of excess cash into long-dated bonds and cut the amount of loans it holds, marking a major shift in how the largest US bank by assets manages its enormous balance sheet.
The moves, which have seen the bank’s bond portfolio increase by 50 per cent, are prompted by capital rules that treat loans as riskier than bonds. As it continues to return billions of dollars to shareholders in dividends and share buybacks each year, JPMorgan has less room than some rivals to hold riskier assets.
“It’s incredible,” said an executive at a large institutional investor. “The scale of what JPMorgan is doing is mind-boggling . . . migrating out of cash into securities while loans are flat.”
The dramatic change, which has occurred this year, was first flagged by JPMorgan at an investor event back in February. Then chief financial officer Marianne Lake said that, after years of industry-leading loan growth, “we have to recognise the reality of the capital regime that we live in”.
The US lender has shrunk its loans portfolio by 4 per cent, or about $40bn, year to date. At the same time as selling off mortgages, the bank has reduced the amount of cash on its balance sheet and used it to buy long-dated bonds.
Mortgage-backed securities account for the bulk of this growth. Banks can hold much less capital against mortgage bonds than the underlying home loans themselves.
Jeffery Harte of Sandler O’Neill thinks JPMorgan’s changed approach “comes down to an economic decision: they can make more money selling [loans] than buying them”.
The bank’s closest competitor, Bank of America, has more headroom under the Federal Reserve’s capital rules and continues to grow its loan portfolio. It has added $43bn in loans so far in 2019, largely but not exclusively mortgages. The contrasting strategy, analysts said, reflects its larger cushion under the Federal Reserve’s stress-testing regime.
JPMorgan is generating strong profits and could add more risk to its balance sheet if it wanted to. But it prefers to send the ample money it generates back to its shareholders. Its plans for the year ahead include $32bn in buybacks and dividends, more than the total net income the bank earned last year.
BofA’s plan is bigger still, at $37bn and almost 140 per cent of 2018 net income, but the fact its business model is lower risk — at least in the eyes of the Fed — means that it is not treated as harshly in the stress tests.
Steven Chubak of Wolfe Research argues that the contrasting strategies have implications for investors. JPMorgan “is doing the right thing given its idiosyncratic capital constraints,” he said, but the greater freedom afforded to BofA means it has “more capacity to grow loans which typically generate a higher spread” — and as such more room for profit growth.
Not all analysts take such a benign view. Charles Peabody of Portales Partners, who forecasts a bleak outlook for the banking industry, sees JPMorgan’s balance sheet choices as part of a larger risk-reduction strategy. The bank, he said, was “acting like the [next] recession is here — everything the bank is doing points that way”.