JPMorgan Chase to Buy Back Nearly $20 Billion Worth of Stock

It wasn't a surprise Wednesday when JPMorgan Chase (JPM 2.51%) announced it has increased the size of its share buyback authorization. What was a surprise, however, was the amount of the increase.

After passing both rounds of this year's stress tests, the nation's biggest bank by assets said its board has cleared a $19.4 billion addition to its common stock repurchase plan. That's nearly double the amount that JPMorgan Chase's board approved last year. It also exceeds the size of similar plans at other major banks.

Source: Regulatory filings.

If JPMorgan Chase executes on its repurchase program, which it's likely to do, the New York-based bank could reduce its outstanding share could by roughly 6%, based on its current market capitalization. That's a meaningful percentage when you consider JPMorgan Chase's size -- it has more than $2.5 trillion worth of assets on its balance sheet.

Jamie Dimon, Chairman and CEO of JPMorgan Chase. Image source: JPMorgan Chase.

"Given the financial strength of the company and the significant capital and liquidity advancements we have made over the last several years, we are pleased to further increase capital returns to our shareholders while continuing to invest in our businesses for long-term profitability," said Jamie Dimon, Chairman and CEO of JPMorgan Chase.

Passing the stress tests

The bank's moves come on the heels of the Federal Reserve's announcement on Wednesday that all 34 of the nation's biggest banks passed this year's Comprehensive Capital Analysis and Review, or CCAR. This is the second phase in the annual stress tests, the first being the Dodd-Frank Act stress tests, or DFAST.

Banks with more than $50 billion in assets on their balance sheets must undergo stress tests every year to assess whether they have enough high-quality, highly liquid capital to survive a severe economic downturn analogous to the financial crisis. In this year's test, for instance, the Fed assumed that the unemployment rate doubles to 10%, gross domestic product contracts by more than 6%, and real estate prices drop by between a quarter and a third.

To pass the first round of the stress tests, the DFAST, a bank must maintain a common equity tier 1 capital ratio, or CET1 ratio, of 4.5% through a nine-quarter time horizon over which the Fed's assumptions play out. To pass the second round, the CCAR, a bank must demonstrate that it would still be able to clear this hurdle even if it increases the amount of capital it returns to shareholders. If a bank meets this burden, and has a sufficiently sophisticated capital planning process, then it will be given the go-ahead from regulators to to increase dividends and share buybacks.

JPMorgan Chase had no problem satisfying these conditions through both stages of this year's stress tests. Its CET1 ratio at the low point of DFAST dropped to 9.1%. This declined further to 6.9% under CCAR. Importantly, however, both still exceed the 4.5% regulatory minimum.

The news that JPMorgan Chase has significantly scaled up its repurchase authorization, combined with a 12% dividend hike, sent shares of the bank up on Wednesday and Thursday. For the month of June, they've climbed more than 10%.