JPMorgan Chase & Co., the biggest U.S. bank, surprised investors and the Federal Reserve when the firm announced two days early that it received regulatory approval for a 20 percent dividend increase.
JPMorgan surged 7 percent on yesterday’s news, which helped drive up the shares of competitors and major stock indexes. The central bank, which tested 19 of the largest U.S. financial firms to gauge their ability to withstand another severe economic downturn, decided to release the results at 4:30 p.m. in Washington, also two days ahead of schedule.
The bank’s disclosure prompted other lenders, including Wells Fargo & Co., U.S. Bancorp and PNC Financial Services Group Inc., to accelerate the disclosure of their dividend plans. It also irritated some staff at the Fed, which had planned to release the test results ahead of the industry, said one person familiar with the central bank’s operations who declined to be identified because the discussions were private.
“It certainly lit a fire under the other bank holding companies, especially the problem institutions which thought they had more time to cushion the blow,” said Karen Shaw Petrou, a co-founder and managing partner at Washington-based Federal Financial Analytics Inc., a regulatory consulting firm.
JPMorgan’s news release, published at 3:04 p.m. in New York, was the result of less-than-perfect communication between the company and the Fed and wasn’t related to the regulator’s accelerated announcement of the stress-test results, a senior Fed official told reporters on a conference call. The central bank doesn’t fault JPMorgan or anyone for the move, the official said.
Barbara Hagenbaugh, a Fed spokeswoman, and JPMorgan’s Joe Evangelisti declined to comment.
The news caught the markets and industry analysts, who were preparing for a March 15 release date, off guard. Brian Foran, a senior bank analyst at Nomura Securities, compared the experience to the wait for his newborn.
“As many of you know I recently had a baby,” Foran said in an e-mail to clients. “It was remarkably similar to having a stress test -- you work towards a due date but the reality is it can come at any moment. And once it does, your sleep schedule is immediately impaired.”
Started to Leak
Fed officials told bank executives earlier yesterday that they were concerned that some of the results had started to leak to the public and decided to release the results after U.S. markets had closed, according to two people who were briefed on the calls. The release was moved up amid concern that some information about the test may have been released inadvertently, said a senior Fed official, who didn’t elaborate.
Other banks subject to the test were waiting until after the Fed’s results were out to announce their capital plans, said one of the people and a senior Fed official.
JPMorgan, led by Chairman and Chief Executive Officer Jamie Dimon, boosted its dividend to 30 cents a share, from 25 cents, and authorized a $15 billion share repurchase plan after passing the stress test, the New York-based company said.
Some investors said it looked like an act of defiance by Dimon.
“Jamie Dimon basically thumbed his nose at the Fed,” said Charlie Smith, who oversees $1.2 billion as chief investment officer of Fort Pitt Capital Group Inc. in Pittsburgh. “That’s what he does, and he’s got the balance sheet to do it. He’s got enough of the cards to say, ‘I’m going to do what I want even if it’s going to force the Fed to come out with its announcement early.’”
Dimon, who turned 56 yesterday, publicly confronted Fed Chairman Ben S. Bernanke last year over the central bank’s move to increase capital requirements on lenders, asking whether overzealous regulation had gone too far and was curbing economic growth.
“I have a great fear someone’s going to try to write a book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon told the Fed chairman during a June banking conference in Atlanta.
The company’s Tier 1 capital ratios fell to a low of 5.4 percent under the Fed’s most adverse scenario, above the 5 percent threshold required to pass the test, the Fed said yesterday. The central bank projected that JPMorgan’s home loans, credit cards and other debt could decline by $55.8 billion while trading and derivatives operations would lose $27.7 billion.
The worst-case scenario includes a U.S. unemployment rate as high as 13 percent and a 20 percent drop in home prices, according to the Fed.
The central bank required the nation’s largest lenders to show they have credible plans for maintaining capital and continuing lending in an economic downturn. JPMorgan said the Fed told the company it completed its review and “did not object” to the bank’s capital plans.
“The Fed is basically releasing examination data showing who are the good guys and who are the bad guys, and that’s going to drive money away from the weaker names,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets. “They are picking winners and losers. I didn’t think the Fed would ever do that.”
The $15 billion in stock buybacks would be enough for the firm to repurchase about 346 million shares at yesterday’s closing price. That represents about 9 percent of shares outstanding. Dimon’s personal stake in JPMorgan gained almost $15 million.
JPMorgan climbed $2.85 to $43.39 yesterday, leading the KBW Bank Index of 24 U.S. lenders to a 4.6 percent gain, the most since November. The lender’s announcement also helped to pad gains for the Dow Jones Industrial Average, which climbed 1.7 percent to 13,177.68, the highest in more than four years.
JPMorgan and the KBW Bank Index were little changed as of 11:45 a.m. today.
The new JPMorgan payout is in line with the $1.15 to $1.25 annual dividend per share estimated by Charles Peabody, an analyst at Portales Partners, in a March 1 report. The share repurchase, which includes $12 billion for 2012 and $3 billion for the first quarter of next year, also is in line with his prediction of $7 billion to $9 billion if employee incentive stock is excluded. That will cost the bank about $5.5 billion over the 12-month buyback program, Peabody said in an interview.