Banks are exposed to the healthy parts of the economy as well as the beleaguered parts. And one of those beleaguered parts these days is brick-and-mortar retail, which has been getting crushed by online competition.
However, these exposures are complex and nuanced, and don’t always translate to massive losses for the banks.
While hosting an earnings conference call, JPMorgan Chase (JPM) CEO Jamie Dimon told Glenn Schorr of Evercore ISI he was “way out of line” with the framing of his question regarding the bank’s exposure to this category of commercial real estate.
“[I] wanted to get out in front of what could be some brewing issues in retail land,” Schorr began.
Schorr continued: “And the perspective I’m looking for is you have plenty of gross exposure to retail and retail-related; however, there seems to be plenty of collateral and you’re typically at the top of the capital structure too. So can you talk about both direct exposure in some of the problem areas and the related exposure in like commercial real estate and the mall side?”
As Yahoo Finance’s Myles Udland has reported, the future of retail in America is looking bleak. In a recent report, S&P Global Ratings, which had already been negative on retail, characterized 2017 as a “tipping point” for the industry as bankruptcies seem likely to increase.
E-commerce giants like Amazon have been disrupting traditional brick-and-mortar stores by offering low prices and the convenience of shopping from home. Anchor tenants at shopping malls like (SHLD) and Macy’s (M) have announced store closures. Other apparel retailers have announced store closures. Now questions linger as to who is on the hook if mall owners or building owners can’t repay their loans because of vacancies.
JPMorgan CFO Marianne Lake explained that JPM’s commercial bank exposure to retail is “pretty modest,” noting that the problems in retail vary.
“I will tell you that while there obviously is a lot of discussion around retail and with some merit, it’s very case-by-case, location-by-location specific,” Lake said, “I kind of liken the discussions we have around our bricks-and-mortar banking businesses, which is consumer — the way consumers engage with retail changing, it doesn’t mean they will stop engaging with retailers. And so it will be very specific with respect to location and tenants, and it doesn’t necessarily mean that retail is going to be in as much potential trouble as I think people are talking about. So we remain cautious watching it but also cautiously optimistic but it’s not — it’s a bit overblown.”
Dimon then chimed in.
“And you assume that we’ve looked at not just direct retailer — retail-related real estate, all of those vendors to any potential retailers,” Dimon said. “When we put it all together, it’s a little bit like — they’ll be something there but it’s nothing that will be dramatically separate.”
Schorr then asked: “Is the main reason your position in the stack meaning I notice you have a lot of collateral against your exposure, and like I said you tend to be a the top of the stack. Is that the main issue? Like I remember doing this with you guys two years ago in oil, while oil was dropping, and it turned out you barely came out with a few cuts and bruises. This seems to be more collateral here, but I don’t want to put words in your mouth.”
Ever since the oil price crash of 2014, the volume of bad loans in the oil production industry spiked, exposing lenders to losses. Some banks navigated through this turmoil better than others.
“Are you talking about real estate related to retail or are you talking about retailers?” Dimon asked.
Schorr responded: “I’m talking both because you do have hundreds of billions of direct retail exposure plus the commercial real estate exposed to it? I’m just thinking if…”
“No, no, you’re way out of line,” Dimon said. “I mean direct retail exposure, we’re very careful. The retail business has always been violent and volatile. You can look back through our history and half of them are gone after 10 years. That is normal course. So we’re usually seen there. We’re very careful of stuff like that. And then go to real estate, OK, most of our real estate has nothing to do with retail. So we do have some shopping centers and malls and buildings and stuff like that, but those are generally high on the stack, well secured, not relying on single retailers etc.”
“OK. I was looking to take your temperature,” Schorr quipped.”
Dimon said that it will be “like oil and gas” for JPMorgan. “It won’t be a big deal.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.