JP Morgan Chase’s small business exposure: is it another threat to investors?
JP Morgan’s is under great criticism, as investors and media continue to question about its bad mortgages, but investors seem to ignore a new potential threat. JP Morgan has been lending aggressively to the small business sector, including businesses though have been rejected for lending by the commercial banks. Not only is this, under JP Morgan second review process, the firm is lending to those small businesses as well, though already have been rejected once by JP Morgan itself. The firm continues to invest aggressively in this sector, with $17 billion fresh loans and credit lines in 2011. Moreover, in 2010, the small business loan volumes were doubled by JP Morgan chase from 2009 levels.
49% of the small businesses fail in first 5 years of establishment:
As per the U.S. Small Business Administration, “Seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more” The assessment is based upon the data provided by US Census Bureau. Accordingly, the survival rates are somewhat similar across states and major industries ofUSA.
SBA statistics on the bankruptcies and closure rates
| Starts and Closures of Employer Firms, 2005–2009 | |||||
|
Category |
2005 |
2006 |
2007 |
2008 |
2009 |
| Births |
644,122 |
670,058 |
668,395 |
626,400 |
552,600 |
| Closures |
565,745 |
599,333 |
592,410 |
663,900 |
660,900 |
| Bankruptcies |
39,201 |
19,695 |
28,322 |
43,546 |
60,837 |
| Bankruptcies as a % of births |
6% |
3% |
4% |
7% |
11% |
It is noted from the above factual data for small businesses, in 2005, 2006 and 2007 on an average 660,000 new businesses were established, whereas 586,000 were closed every year. In 2008 and 2009, the situation worsened, when more businesses were closed then opening. The uncertain economic activity could be the reason for increased closures and bankruptcy rates in 2008 and 2009.
JP small business portfolio:
JP Morgan has become largest Small Business Administration lender ofUSA. In 2011 alone, through nearly 400,000 new loans and credit lines, the firm lent $17 billion to American Small business-an increase of 52% from 2010 levels. Out of $17 billion, $4.7 billion or 28% was lent to 75,000 companies based inCalifornia.
Moreover, in 2010, the firm exceeded its own set target of $10 billion fresh credit lending to this sector, where actual lending was recorded at $11.2 billion. Also, it extended credit to over 250,000 small businesses and generated annual sales of nearly $20 million through business banking, cards and commercial banking services.
Firm’s offerings to small businesses:
Besides usual lending to small business, the firm offers variety of business solutions to small business operators. This includes cash and management services, local and international banking, assets lending, retirement planning, commercial, real estate and health savings accounts. Moreover, Retail Financial Services (RFS) provides a range of settings like in-person service at bank branches, auto dealerships, telephone banking; automated teller machines and online and mobile banking.
Commercial Banks Say “NO”, Hedge Funds Say “YES Please!”:
The print media has been reporting several cases in which the commercial banks rejected to extend loans to small businesses, but they were welcomed by the hedge funds.
The hedge funds are taking undue risk that can affect there profitability in the long run.
In June 2011, The New York Times reported case of D. Hunt Ramsbottom, CEO of Rentech, an energy business. The company was rejected for further loans by its long time banker. He then approached hedge funds, where he was able to borrow from a group of funds at a high rate of 12.5%. That’s how hedge funds are turning commer5cial banks’ ‘’No’’ into ‘’Yes’’.
JP Morgan one-step ahead of other hedge funds:
Where hedge funds are welcoming the small business borrowers though have been rejected by the commercial banks, JP Morgan Chase stands a head of them. It is not only welcoming small business rejected by the commercial banks but also reconsidering its own rejected loans. During 2010, JP Morgan Chase approved loans amounting more than $250 million to small businesses through its second review process.
SBA office of Advocacy reports 1.2% decline in outstanding loans of small business:
In the third quarterly report of SBA office of advocacy states that the outstanding small business loans, $1 million or less, have declined by 1.2% to reach the levels of $599.7 billion in September 2011. The major declines were recorded in the commercial real estate loans. Contrarily, a moderate increase was seen in the small business loans offered by megalenders ($50 billion or more in assets), except C&I loans of $100,000 or less.
“This is the way JP Morgan Chase is making a difference.”
JP Morgan is sure making a difference. There investment decision to purchase Bear Stearns and Washington Mutual with their mortgages portfolio definitely made some difference, as investors are now filing suits and media busy reporting them. BeingUS largest bank, investor expects sophisticated investment decision from JP Morgan and expects that it will not repeat the history. The aggressive investment in the small business companies, with high risk profile, can spill fresh blood in the market.
The reason for aggression:
JP believes that there is a large potential in the Small Business Banking and believes that in the long run the company can generate as much as $1 billion pre-tax annually.
Is JP Morgan heading in the right direction?
JP Morgan already holds a huge portfolio of bad mortgages, including their own, Bear Stearns and Washington Mutual. The increasing losses from the acquired portfolios have shattered investors’ confidence in the firm. Moreover, suits by Sealink Funding Ltd and HSH Nordbank claiming JP Morgan for misleading information on the underlying loans have also dented the reputation. But now the question arises about the base on which JP is lending too much to this sector? It is too early to say what will be the end result. But at least one thing is clear that the company is taking undue risk exposures.
