While addressing The Goldman Sachs Group Inc. (GS) investor conference on Wednesday, JPMorgan Chase & Co. (JPM) CEO Jamie Dimon stated that the company has the authority to buyback more of its shares. The company made this possible by utilizing less money on dividend payments than what was approved by the Federal Reserve.
Now as a part of the earlier approved capital plan, JPMorgan can spend $950 million on share repurchases. Earlier this year, the company along with 18 other banks, including Bank of America Corp. (BAC), Wells Fargo & Company (WFC) and Goldman, had gone through the Fed’s third round of stress tests to secure approval for dividend increases and share buybacks.
Following the stress test clearance, JPMorgan was allowed to increase dividend and buyback shares. In March, the company announced $15 billion multi-year stock repurchase program. Out of this, up to $8 billion of common stock repurchase was approved for 2011.
JPMorgan has already exhausted its authorized limit for 2011, thus, it was unable to repurchase shares when the share prices were depressed. However, the scenario changed due to a decrease in use of capital for dividend payments. Now, the company can comfortably deploy a part of its capital for buying back shares.
Though Dimon stated that the company is eager to buyback more shares, JPMorgan is facing constant regulatory pressure to conserve capital as a way to lessen its future losses. Also, early next year, the company along with 30 other banks (with $50 billion or more as assets) will have to undergo another round of stress tests to prove their financial stability to confront another recession.
Additionally, JPMorgan, Citigroup Inc. (C), Bank of America, Morgan Stanley (MS), Goldman and Wells Fargo will have an even higher stumbling block to clear as they have significant exposure to the stressed European countries — Greece, Ireland, Italy, Portugal and Spain — known as the GIIPS.
The Fed has stated that only those companies that successfully confirm their core capital to remain above 5% of risk-weighted assets under the stressful scenarios will be given permission to hike dividend and buyback shares.
Our Viewpoint
Though JPMorgan’s capital and balance sheet position remains strong, the company faces regulatory issues related to Basel III capital requirements. The company, along with other large banks, is required to achieve Tier 1 common equity ratio of 9.5% by the end of 2018. Though the management is confident about reaching that ratio by the end of next year, it does not wish to take any chances by indulging in unnecessary capital usage.
Till then, the investors will have to wait and see whether JPMorgan goes for share repurchase or not. If the company does so, it will definitely be pleasant news for the investors as their investments in JPMorgan will get enhanced.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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