Does JPMorgan Chase still have a fortress balance sheet?


JPMorgan Chase (NYSE: JPM), the largest bank in the United States, has long been known for its fortress balance sheet, which is one of the things Chief Executive Jamie Dimon is most proud of. A fortress balance sheet means the bank has enough capital and is sufficiently liquid to withstand a severe economic shock and still be able to lend money to individuals, families and small businesses. Examples of economic shocks are those seen during the Great Recession and at the start of the coronavirus pandemic.

But over the next few years, JPMorgan Chase is expected to build capital from its current levels. Will the bank still have the fortress balance sheet that made it famous? We’ll take a look.

Higher regulatory capital requirements

Since the Great Recession, banks as a whole have been required to hold more capital, as required by regulators like the Federal Reserve, to ensure the global banking system is prepared for the worst.

A good way to look at a bank’s regulatory capital levels is by using its Common Equity Tier 1 (CET1) ratio, which is a bank’s core capital expressed as a percentage of its risk-weighted assets. based on risk, such as loans. JPMorgan Chase ended the first quarter of 2022 with a CET1 ratio of 11.9%, well above its current requirement of 11.2%.

But management expects this requirement to continue to increase over the next few years. The CET1 ratio is made up of three layers:

  • The lower 4.5% that each bank must maintain,
  • The stress capital buffer (SCB), which is largely determined by stress tests conducted annually by the Fed, and
  • The Global Systemically Important Bank Charge (G-SIB), which only affects the largest banks like JPMorgan Chase.

Management expects SCB and G-SIB requirements to increase next year and therefore targets a CET1 ratio of 12.5% ​​to 13% by Q1 2024.

Data source: JPMorgan Chase.

Half a percent may not seem like a lot, but considering we’re talking tens and hundreds of billions of dollars, a fraction of a percent can be a lot of capital. For example, at the end of the first quarter, JPMorgan Chase had $208 billion in CET1 capital and risk-weighted assets of $1.753 billion, which is where the CET1 ratio of 11.9% comes from. To raise the ratio to 12.5%, the bank would need about $12 billion more in capital or would have to reduce risk-weighted assets. And remember that capital is replenished by earnings each quarter, but is also diminished by dividends, share buybacks and loan growth.

The need for capital build-up may limit potential dividend growth and share buybacks. JPMorgan Chase has previously said it does not plan to increase its dividend in the current quarter, although many other banks are doing so. Additionally, by 2024, the bank expects to have $13 billion to $22 billion in excess capital above its new target CET1 ratio. It’s certainly not trivial, but consider that JPMorgan has authorized a $30 billion share buyback program in 2021. JPMorgan must also use this capital to cover the dividend and for new business opportunities.

Does JPMorgan Chase still have a fortress balance sheet?

The bank may need to build up capital and may not have as much excess capital for distributions to shareholders, but it still has a fortress balance sheet. JPMorgan Chase has more than $1.6 trillion in cash reserves, US Treasury securities and other highly liquid assets.

JPMorgan also passed a stress test this year. The Fed put the biggest banks in the United States through a hypothetical nine-quarter scenario in which unemployment topped 10%, commercial real estate prices fell 40% and stock prices fell 55% . Meanwhile, the Fed calculated that JPMorgan would suffer more than $64 billion in loan losses, take a loss of nearly $41 billion, and only see its CET1 ratio fall to 9.8%, which remains a very healthy level of capital.

So yes, JPMorgan Chase still has a strong balance sheet and is arguably one of the safest banks in the world. But as regulatory capital requirements increase, the bank may still need to build up capital and capital distributions may be more modest in the short term than in the past.

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