JPMorgan to boost ‘fortress’ balance sheet

JPMorgan Chase has requested a share buyback of about half last year’s $15bn programme, according to people familiar with the matter, as the bank aims to ride out the Federal Reserve’s stress tests and strengthen its “fortress” balance sheet.

Investors and executives have a nervous wait to find out whether JPMorgan, Goldman Sachs and other leading Wall Street institutions receive Fed authorisation for their capital plans next week.

Shares in Goldman fell more than 2 per cent on Friday, the biggest decline among its peer group, after the Fed revealed stress test results on Thursday evening that found the bank came closer than expected to falling below minimum capital levels during a hypothetical severe recession.

Goldman’s ratio of common equity to risk-weighted assets fell to 5.8 per cent in the scenario. Morgan Stanley’s fell to 5.7 per cent. The “pass-fail” threshold was 5 per cent.

However, the results do not include the impact of confidential capital requests from the institutions. Banks now know whether those requested payouts would take them below 5 per cent. If that is the case they have one chance to submit a lower request.

The more conservative request from JPMorgan – which combines the lower buyback with a moderate dividend increase – should ensure it wins approval since its stressed capital ratio was a reasonable 6.3 per cent. JPMorgan declined to comment. The Fed declined to comment on the industry’s capital requests.

Even though a big planned payout from Goldman and Morgan Stanley could cause them to fail, that is not expected to happen. Morgan Stanley has said it has not asked for an increased dividend or share buyback as it is concentrating on acquiring Smith Barney, the retail brokerage, from Citigroup. Analysts believe Goldman has not asked for a bumper payout and so should pass.

However, banks that pass the tests with their planned payouts could still run into trouble if the Fed decides there is a “qualitative” weakness in their capital planning, one of the remaining threats hanging over the industry.

One senior bank executive said there was a concern that a bank might encounter criticism or even fail the exercise because of process weakness and might consider submitting a lower request to try to avoid this scenario.

“It’s like having a math test and even though you’ve got all the right answers you still fail because the professor didn’t like the way that you got there,” the executive said.

As part of its examination, the Fed is looking at institutions’ own stress-testing to see why they came up with different results. Officials projected a $32.3bn loss at JPMorgan in the hypothetical scenario compared with the bank’s own projection of a loss of just $200m.

Such differences could potentially hurt JPMorgan and other institutions in the qualitative test.

Jamie Dimon, chief executive of JPMorgan, said in January that the bank was “going to ask for less capital return from stock buyback” while modestly increasing its dividend request, in order to reach a new target of 9.5 per cent equity to risk-weighted assets by the end of the year.

“We’re going to do less because we’ve determined . . . that we want to get to 9.5 per cent quicker and we don’t exactly know how these stress tests work,” he said.

By slashing the buyback request by about half, JPMorgan is reining in its payout by more than some analysts expected.

Mr Dimon has long claimed the bank has a “fortress” balance sheet, although JPMorgan had to suspend its buyback programme last year after the company incurred more than $6bn in losses from the “London whale” debacle.

Seventeen out of 18 institutions passed this week’s stress tests, with only Ally Financial failing to meet minimum capital levels in the hypothetical scenario of a deep global recession and a shock to markets.