JPMorgan Chase & Co. (JPM) has postponed its massive buyback plan yet again. This is the second time that the company has delayed its share repurchase program. The clean up of the multi-billion-dollar trading loss is cited as the reason for this delay.
Background
In March, after passing the stress test, JPMorgan and other major banks, such as The Goldman Sachs Group Inc. (GS) and U.S. Bancorp (USB) received clearance for implementing their capital deployment actions. JPMorgan had announced a new equity repurchase program under which the company was authorized to buyback $15 billion worth of common stock. Out of the approved $15 billion, $12 billion was authorized for FY12 and an additional $3 billion for the first quarter of 2013.
In May, JPMorgan’s chief investment office (CIO) incurred substantial mark-to-market losses in an index of credit default swap (a type of derivative), which was to protect the company against potential losses on its large holdings of loans and bonds. However, the company’s strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed, thereby resulting in a loss of $2 billion.
Immediately, following the fiasco, JPMorgan’s CEO announced the suspension of the company’s $15 billion share repurchase program. The primary reason for this was the fact that it did not want any glitches in the path of meeting the Basel III capital requirements. The company assured the investors of restarting the program once it is able to rebuild the lost capital.
Last month, when JPMorgan declared its quarterly results, the CEO was hopeful of recommencing the buyback plan in the fourth quarter of this year. However, he remained skeptical of the ongoing investigation of the trading loss dubbed as the “London Whale.”
JPMorgan has decided to further delay the share repurchase program up to the first quarter of 2013 as the investigation not yet over and the losses are gradually increasing. Moreover, the company is yet to submit its revised capital plan to the Fed, seeking approval for restarting the share buyback program.
Our Take
The trading debacle and delay of share buyback have dented investors’ confidence on JPMorgan’s balance sheet position. However, JPMorgan has no plans to suspend or cut down its quarterly dividend and this will surely please the investors.
The company’s diversified revenue base, global footprint, stable capital position and continuously improving credit quality are expected to enable it to post strong results going forward. Moreover, these factors are anticipated to help it withstand the huge trading loss and resume its share repurchase activity.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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