JPMorgan Sees Consumer Loan Defaults Rising

JPMorgan Chase said on Friday it expects consumer loan defaults to increase in the current quarter and expects to set aside more money to cover bad loans.

Consumer debt including credit card and auto loans are widely seen as the next area to hurt financial institutions already reeling from subprime mortgage losses and global financial market weakness.

JPMorgan more than $395 billion in consumer loans, with the largest chunk in home equity loans. Mortgages, credit cards and auto loans are also in the portfolio, according to a filing with regulators on Friday.

The bank warned about its consumer loan exposure last quarter as well, but there is new evidence of weakness among U.S. borrowers.

Retail chains this week posted the worst monthly sales data in more than three decades as consumers slashed spending. A government report last week said consumer spending dropped at an annualized 3.1 percent rate in the third quarter, the biggest pullback since 1980.

JPMorgan has always had a large consumer banking business and in September, with its acquisition of Seattle -based thrift Washington Mutual, it increased its consumer portfolio.

"Given the potential stress on the consumer from rising unemployment, the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious," the bank said in the filing.

It warned that home equity loans and more risky mortgages made since 2006 make up a large chunk of its portfolio, and defaults are rising as home prices continue to fall.

JPMorgan expects charge-offs of bad loans in its home lending portfolio to increase in the current quarter and into 2009, the filing said.

The bank last week said it is temporarily halting foreclosures and offering to renegotiate about $70 billion in mortgages for homeowners struggling to pay.

Outperforming Rivals

The bank's mortgage portfolio has performed better than that of some of its rivals because JPMorgan did not make as many of the more risky types of loans that caused massive writedowns at other banks such as Wachovia .

JPMorgan has $18.2 billion of risky mortgages known as subprime, including $4.7 billion of subprime loans acquired when it bought Washington Mutual in September.

The bank expects more credit card borrowers to fail to pay balances, meaning it will have to write off more balances as unpaid.

Separately, the bank said it expects an after-tax gain of $600 million in the fourth quarter from the dissolution of Chase Paymentech Solutions, a joint venture with payments processor First Data .

JPMorgan's shares were down $1.28 at $36.98 in afternoon trading on the New York Stock Exchange.

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