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JPMorgan management still sanguine as reserves rise due to C&I downgrades

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JPMorgan management still sanguine as reserves rise due to C&I downgrades

JPMorgan Chase & Co. significantly increased its provision for credit losses in the 2018 fourth quarter, but executives said there were no signs of broad deterioration in credit quality.

The bank on Jan. 15 reported earnings that included $1.55 billion of provisions for credit losses, up about $600 million from the linked quarter and $240 million higher than the year-ago quarter. Management said the higher reserves were in both consumer, driven by card loan growth, and wholesale, which was related to downgrades of commercial-and-industrial, or C&I, loans. But management said there were no signs the issues were concentrated by sector or indicative of a broader turn in credit quality.

"It was driven by literally a handful number of names across a handful of sectors," said CFO Marianne Lake during a media call. "And so nothing about that points to any systematic deterioration in any one sector or any concerns that we have about our portfolio."

Several analysts asked about credit quality concerns during an earnings call, and management said there were no signs of a turn in the credit cycle. Net charge-offs remained flat and were near historic lows in the quarter, according to the bank's earnings results. Lake said the C&I downgrades were related to five companies across four sectors and were "situationally specific." She said the bank upgrades and downgrades hundreds of loans on a regular basis.

"If anything, marginally we have more upgrades. There's nothing to see right now in our portfolios, and we're looking," Lake said. Chairman and CEO Jamie Dimon added that the bank looks for reasons to increase reserves, a sentiment Lake echoed. The bank is "overly paranoid to survive," she said. "We're more paranoid than you are."

The credit quality discussion led some analysts to ask about the leveraged lending space, an area some regulators have said appears frothy. Dimon and Lake said they believe regulators are primarily addressing nonbank companies, which have been more aggressive. By contrast, Dimon said banks have approached the leveraged lending space and collateralized loan obligations much more cautiously with more prudent underwriting standards than in the pre-crisis era.

"They are far better underwritten with more equity, more sub debt and more mezzanine — stuff like that," Dimon said. "And now go to those shadow banks. They do things slightly differently. A lot of those folks are — they're quite bright. They kind of know what they're doing. Someone's going to get hurt there."

Dimon did identify two areas where he said there was a lack of discipline in underwriting: student loans and small commercial real estate lending. He said the bank would maintain strict credit discipline and would not hesitate to sacrifice loan growth. However, Dimon said the data continues to suggest credit quality is strong, giving JPMorgan no reason to pull back yet.

"I don't know if we're late cycle," Dimon said. "We don't exactly know where we are in this cycle."