In a surprising turn of events, JPMorgan Chase & Co.’s (JPM) CEO announced the suspension of the company’s $15 billion share repurchase program. The announcement was made at the Deutsche Bank Securities Global Financial Services Investor Conference in New York on Monday.
The primary reason for the halt was the fact that it does not want any glitches in the plans to meet the Basel III capital requirements. JPMorgan would re-start the program once it is able to rebuild the capital it lost as a result of the $2 billion trading loss, which it incurred in the first six weeks of the current quarter.
On May 10, JPMorgan had announced that it incurred substantial losses in an index of credit default swap (a type of derivative), which was supposed to protect the company against the 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.
JPMorgan had also stated that its Tier 1 common ratio under Basel III is expected to fall to 8.2% of risk-weighted assets from 8.4% in the first quarter as a result of the trading loss. Management anticipates reaching Tier 1 common equity ratio of 8.5% by the end of this year.
In mid-March, after clearing the stress test, JPMorgan had announced a new share repurchase program under which the company was authorized to buyback $15 billion worth of its common stock. As per the regulatory filings, the company repurchased 42 million shares for $1.3 billion in the first four months of 2012.
The clearance of the stress test had enhanced the shareholders’ confidence to a great extent. The test proved that JPMorgan has adequate capital to address potential losses under several stressful scenarios. The company along with five other big U.S. banks – Citigroup Inc. (C), Bank of America Corp. (BAC), Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) and Wells Fargo & Company (WFC) – had an even higher stumbling block to clear as they are significantly exposed to the stressed European countries.
Our Viewpoint
The suspension of share buyback and the huge trading losses have dented the investors’ confidence on JPMorgan’s stable balance sheet position. Within 8 trading days (May 10-May 21), the company’s share price plunged nearly 20%.
However, amid this terrible situation, the investors have something to cheer about. JPMorgan has no plans to suspend or cut down its quarterly dividend. The company pays a quarterly cash dividend of 30 cents per share.
We believe that JPMorgan will be able to withstand this huge trading loss and soon restart its share repurchase program. The company’s diversified revenue base, global footprints, stable capital position and continuously improving credit quality are expected to enable it to post strong results going forward.
Until JPMorgan announces something very positive like strong quarterly results or revival of the share buyback program, we believe that its shares would continue to lose value.
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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