On Tuesday, the Federal Reserve informed
JPMorgan Chase & Co.
(
JPM
) that its capital deployment plan, submitted under Comprehensive
Capital Analysis and Review (CCAR) or the stress test, has been
approved. Consequently, the company announced a dividend increase
and a new share repurchase authorization.
JPMorgan increased its quarterly dividend 20% to 30 cents per
share. The dividend is payable on April 30 to the shareholders of
record at the close of business on April 5. Hence, the annual
dividend payable to the shareholders comes to $1.20 per share.
This is the second time that JPMorgan has hiked its dividend
since the financial crisis. In 2011, the company had raised its
quarterly dividend fivefold to 20 cents per share, following the
Fed's approval. In the midst of the financial crisis, JPMorgan had
to slash its quarterly dividend to 5 cent per share and take
bailout money from the government to stabilize its financials.
JPMorgan also announced a $15 billion stock repurchase program.
Out of this, up to $12 billion of common stock buyback is approved
for 2012 and remaining $3 billion has been agreed for the first
quarter of 2013.
Under the provisions of the Dodd-Frank financial reform law, the
large US banks (with total assets of $50 billion or above) are
required to demonstrate that they have adequate capital to address
potential losses under several stressful scenarios. The
hypothetical scenarios included rise in the unemployment rate to
about 13%, a more than 50% decline in the Dow Jones Industrial
Average and a drop of more than 20% in home prices.
Hence, in January, JPMorgan along with other large US banks such
as
Bank of America Corp.
(
BAC
),
Morgan Stanley
(
MS
) and
Goldman Sachs Group Inc.
(
GS
) had submitted their capital plans to the Fed for the fourth round
of stress tests. The banks were required to prove their financial
stability by keeping their core Tier I common equity above 5% under
stressful conditions.
Moreover, the six big U.S. banks -
Citigroup Inc.
(
C
), Bank of America, JPMorgan, Morgan Stanley, Goldman and
Wells Fargo & Company
(
WFC
) -had 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.
With the announcement of the results, out of these six firms,
only Citigroup failed to clear the stress test. The bank has been
asked to resubmit its revised capital plan to the Fed, later this
year.
Conclusion
The economic benefits of the stress tests are immense. These
would keep the banks on their toes. Due to this, the banks would
perform under pressure and try to rebuild their weak capital
structure. The whole idea of the stress test could ultimately
translate into less involvement of the taxpayers' money for bailing
out troubled financial institutions.
Also, from investors' point of view, with JPMorgan clearing the
stress test, it is for sure that the company will be able to
withstand another financial crisis.
Currently, JPMorgan retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Also, considering the fundamentals,
we are maintaining a long-term "Neutral" recommendation on the
stock.
BANK OF AMER CP (
BAC
): Free Stock Analysis Report
CITIGROUP INC (
C
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
JPMORGAN CHASE (
JPM
): Free Stock Analysis Report
MORGAN STANLEY (
MS
): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
Report
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