A day after it was disclosed that JPMorgan Chase & Co. (JPM) will have to increase its capital levels by nearly $22 billion owing to the additional capital surcharge proposed by the Federal Reserve; Marianne Lake, the chief financial officer (CFO) of the company, expressed hopes to meet the requirement with minimal operational changes. The CFO was speaking at an investor conference sponsored by The Goldman Sachs Group, Inc. (GS) in New York.
The CFO stated that the new proposed rule will put JPMorgan in the highest bracket of additional cushion of 4.5% of total risk-weighted assets (RWAs). This will come over and above the common equity capital requirement of 7% of RWAs.
Over time, JPMorgan plans to maintain 12% capital ratio, just 0.50% above the minimum requirement. Also, the company will not hasten to reach the requirement and intends to maintain the current payout ratio of 75%.
Moreover, JPMorgan does not have any plans to cut back operations and shrink to lower the capital surcharge. The deadline of complying with the new rule is 2019. As of Sep 30, 2014, the bank had a Tier 1 common equity ratio of 10.1% under fully phased-in rules.
Earlier in the week, the Fed had proposed additional capital surcharge for big 8 U.S. banks including JPMorgan, Bank of America Corporation (BAC), Citigroup Inc. (C) and Goldman. These, categorized as Globally Systematically Important Banks (GSIBs), will have to meet an estimated capital surcharge in range of 1.0–4.5% of total RWAs. Regarding this, the comments of the central bank’s Vice-Chairman Stanley Fischer during a public Fed meeting implied that JPMorgan will be hardest hit by the proposed rule. (Read More: Banks May Face Additional Capital Surcharge: Time to Shrink?).
Further, JPMorgan CFO echoed almost similar sentiments related to market revenue as BofA and Citigroup. JPMorgan’s core-trading revenue is expected to suffer a decline of 4% year over year. Notably, given the sale of its physical commodities business, overall trading income may drop further. Also, the trading conditions are not expected to improve before mid-2015.
The new capital surcharge requirement should make investors apprehensive about JPMorgan’s ability to enhance its capital deployment activity going forward. Further, continued pressure on trading revenue adds to the concern. All these factors made investors wary, thereby causing a 2.8% fall in JPMorgan’s share price.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment