J.P. Morgan Exceeds Fed Minimum Capital Level Under Stress Scenario

By Emily Glazer 

J.P. Morgan Chase & Co. has the capital to keep lending in a severe economic downturn, the Federal Reserve calculated Thursday in the first stage of its annual stress tests.

At the low point of a hypothetical recession, J.P. Morgan's common equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, was 8.3%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated.

J.P. Morgan's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 6.2%, exceeding a 4% minimum.

The stress tests simulate a worldwide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year included a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

J.P. Morgan, the largest U.S. bank by assets, has been shrinking over the past year in efforts to become simpler and less sprawling as new capital regulations are set to roll out in coming years. That has, in part, allowed the bank to boost its quarterly dividend. One notable point in this year's result: J.P. Morgan's pre-provision net revenue jumped to $64.9 billion in this year's test, more than double the $30.4 billion in last year's results.

J.P. Morgan passed the stress test over the past five years, though in 2013 it got a "conditional" approval due to "weaknesses in its capital plan or capital planning process," the Fed said at the time. It resubmitted its capital plan to the Fed later that year.

Both of J.P. Morgan's key ratios were substantially higher than last year, when the Fed calculated that the bank would have a common equity Tier 1 capital ratio of 6.3% and a Tier 1 leverage ratio of 4.6% at the low point of a recession.

Last year, J.P. Morgan adjusted its capital plan to the Fed in the week between the two results, giving it more room to past the second test.

The bank leverages around 3,000 employees across the firm to work on these stress tests, including weekly senior-level steering committees related to the exercises.

Write to Emily Glazer at [e-mail]

(END) Dow Jones Newswires

June 23, 2016 17:13 ET (21:13 GMT)

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