New York: JPMorgan Chase & Co is concerned about loans that finance some leveraged buyouts, and is scaling back from what is a booming area, even as its overall loan portfolio grows, a top executive said in an interview.
Loans that fund smaller leveraged buyouts, where companies often do not have the size or financial resources to weather a business downturn, look particularly hazardous, Doug Petno, chief executive of commercial banking at JPMorgan, said.
Other lenders seem to be overly confident about the future because loan losses in leveraged buyouts considered a risky area in general — have been low recently, Mr Petno added. Seven years after the financial crisis, lenders are relatively sanguine about credit risk. Outstanding loans grew 1.63 per cent in the first quarter for all US banks from the fourth quarter, according to the Federal Reserve, a solid pace by historical measures.
But JPMorgan, the largest US bank by assets, is growing slower than the overall market, and sees reasons to be more selective about credit quality now. On Tuesday, it said its loan book grew just 0.9 per cent on a sequential basis to $764 billion.
All of JPMorgan’s middle market loans represent about $50 billion of that, so the slow growth likely reflects caution in other areas of the bank, too.“It is quite likely that the bad loans in the industry are getting done today, when the credit market is so benign and everybody is lending,” Mr Petno said before the bank posted better than forecast quarterly earnings.
Bank stock analyst Fred Cannon of Keefe, Bruyette & Woods, said JPMorgan’s caution may take time to prove its value. “In the short-term it limits their participation in the economic booms, but it probably helps them stay away from the busts, too,” Mr Cannon said. “It makes them more stable.”
Regulators share JPMorgan’s concerns about credit quality for leveraged buyouts, in which companies are acquired using borrowed funds, often using their assets as collateral. In 2013, the Fed and other US regulators set guidelines for how much debt was reasonable for private equity firms to use in leveraged buyouts.
