The recent collapse of subprime auto-lenders Tricolor Holdings and debt-heavy auto-parts company First Brands has raised questions about the health of the credit market. JPMorgan’s CEO Jamie Dimon voiced caution over the high-profile crack-ups, saying his “antenna” is up.
“When you see one cockroach, there’s probably more,” Dimon said on the bank’s third-quarter earnings call with analysts.
JPMorgan had no exposure to First Brands, but it’s taking a $170 million hit from the Tricolor bankruptcy. After many years of a “benign credit environment,” Dimon said that “hopefully” the credit cycle will unwind in a “fairly normal” way.
“I do remind people we’ve had a bull market for a long time,” Dimon said. “Asset prices are high, a lot of credit stuff that you would see out there, you will only see in a downturn.”
Dimon said the bank will “scour all processes, all procedures, all underwriting,” in the wake of Tricolor’s collapse.
Analysts on the call asked for guidance on how investors should think about risks to the greater economy and credit markets posed by non-bank lending.
CFO Jeremy Barnum said that non-bank lending is “a very, very broad space,” and that lending to subprime auto-lenders is a different beast from “lending to like trillion dollar asset managers on a secured basis.”
Jamie Dimon and Private Credit
There have been two constants during the boom in private credit and non-bank lending over the last few years: non-bank entities are lending more than ever, and JPMorgan Chase CEO Jamie Dimon criticizing non-bank lending.
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In May of last year, Dimon said there could be “hell to pay” if private credit markets wobble, even though the bank set aside $50 billion of its own balance sheet to make direct loans earlier this year.
While Dimon said that he finds his bank’s underwriting standards to be higher than his competitors, his bank can “make mistakes too,” he said. But there may be another culprit.
“There clearly was, in my opinion, fraud involved in a bunch of these things,” Dimon said. The bankruptcy trustee’s lawyer in the Tricolor bankruptcy previously said that the firm’s business “appears to be a pervasive fraud of rather extraordinary proportion.”
Barnum and Dimon were not ringing the alarm bell about the entire non-bank lending sector, and it’s important to note that increased non-bank lending does, potentially, take some business away from the traditional syndicated lending of banks like JPMorgan.
BlackRock CFO Martin Small said on his firm’s earnings call on Tuesday that its private lending business, buoyed by the acquisition earlier this year of private credit giant HPS Investment Partners, is seeing “generally strong credit quality” from borrowers.
“They’re not seeing widespread credit stress,” he said.
Even private-credit skeptic Dimon agreed that not all private loans are equal.
“I suspect, when there’s a downturn, you will see higher than normal type of credit losses in certain categories,” Dimon said.
