When JPMorgan (JPM) reported a multi-billion dollar trading loss last year, shareholders were upset, but the regulators were furious. We are still in a period where the banking system is still fragile. Regulation is already very heavy and will only get tighter as stricter capital requirements are enforced.
JPM is the nation's largest bank and therefore has seen much more scrutiny lately. Given that banks are now required to hold additional capital based on the risk profile of their underlying assets, it has caused profitability to drop. This additional capital cannot be monetized and instead must be held. So stricter regulation directly impacts each and every shareholder.
JPM's recent earnings call should help calm investors. Not just because of the strong growth the company saw for the quarter, but also because they are meeting their regulatory requirements ahead of schedule.
Here are the regulatory highlights:
- Basel III Tier One Common Ratio of 9.3% ($148 billion)
- Expected to increase to 9.5% by the end of 2014
- Liquidity coverage of a 118%
- Tier One leverage ratio of 4.7%
The liquidity coverage requirement is expected to be 100% in 2019. So JPM is way ahead of its goals there. The biggest concern going forward when it comes to meeting these requirements will be regarding leverage.
The Fed is pushing for a 6% leverage ratio for the nation's largest banks. Both the FDIC and Fed believe that the current 3% requirement is not sufficient in times of a crisis.
While the company has a 4.7% leverage ratio, it is still off from the 6% the Fed is requiring. However, JPM has stated that by holding distributions flat, it will add another 60 basis points in 2014. While dividend investors may be disappointed, it's really not as bad as it sounds. JPM just raised its dividend in March after the CCAR test. Once the company can meet the Fed leverage requirement of 6%, shareholders are in a position to see an increase in distributions.
Ignore the short-term noise about the distributions going forward. Given its size, JPM will be subject to significant scrutiny, but I believe the 6% leverage ratio should ease the Fed's and FDIC's concerns. Based on the recent earnings call and recent Fed news, I believe JPM will not be raising its dividend until mid-2015. At this point, I would also expect the company to buy back shares as it gets more comfortable with its capital position.