Bankers eyeing warning signs for credit cycle downturn, says JP Morgan chief
Bankers are paying close attention to early warning signs of a downturn in the credit market, a top JP Morgan executive has told Morning Wire, as economic uncertainty and a spate of corporate collapses spark lender caution.
Filippo Gori, co-head of Global Banking at JP Morgan, cited a rise in rates of fraud as well as the possibility of higher inflation as among top concerns for banks in the year ahead.
Gori said: “Ultimately, the credit cycle needs to come to an end at some point. It has been benign for a prolonged period of time. What will cause the credit cycle to normalise? We don’t know, but spreads are now very tight considering everything else that is going on.
“We have seen and observed that there is more fraud, especially in asset-based lending. Some people think that fraud is a canary in the coal mine, meaning if borrowers become fraudulent it means they have exhausted all the other options.
“Could it be an early warning that the cycle is turning? That’s the question we’re asking ourselves. Everything seems to be going fine but we need to be cautious because things will come to an end.”
Gori warned of the possibility that inflation “might come back later in a way that is not fully understood”.
“There will be an adjustment at some point [but] calling it is very difficult,” he added.
Banks were rocked by the collapse of US car parts firm First Brands in September, with the business revealed to have been in billions of dollars of debt due to “opaque” off-balance sheet financing structures. It was followed shortly afterwards by the bankruptcy of subprime US auto lender Tricolor.
Bank of England governor Andrew Bailey has questioned whether the collapses exhibit signs of “what used to be called slicing and dicing and tranching of loan structures going on and if you were involved before the financial crisis then alarm bells start going off at that point”.
Gori said: “While you take each of them individually and idiosyncratically you can explain why this is happening… How many idiosyncratic events are necessary before it becomes a trend?”
JP Morgan UK expansion plans
The remarks come as JP Morgan prepares to introduce its Security & Resiliency Initiative (SRI) to the UK.
First announced in the US in October, the $1.5 trillion, 10-year plan aims to facilitate, finance and invest in key strategic areas such as defence and aerospace, energy independence and the supply chains for critical minerals and advanced manufacturing.
The bank has hired one of Warren Buffet’s right hand men, Todd Combs, to lead the investment side of the initiative – alongside a council of advisers from the public and private sectors, including Jeff Bezos, Michael Dell and Condoleezza Rice.
As in the US, the UK commitment will include direct equity and venture capital investments from JP Morgan.
JP Morgan is set to double down on the UK with plans to build its largest European presence through a new tower in Canary Wharf.
The US banking juggernaut said it intends to build a new 3m square feet tower in London, which will inject as much as £10bn over the next six years into the local economy.
The project is also expected to create an additional 7,800 jobs across construction and other local industries. Once finished it will house up to 12,000 and serve as the bank’s main headquarters in the UK.
JP Morgan has held on to its place as the top EMEA investment bank for more than a decade, according to figures compiled by Dealogic, with revenue of just under £1.9bn.