In the back half of 2022, several large banks including JPMorgan Chase (JPM 2.51%) had to pause share repurchases as they prepared for higher regulatory capital requirements this year and in 2024.
It initially looked like it would take JPMorgan Chase some time to build the necessary capital it would need to then resume share repurchases. But the bank got there quicker than anticipated and now can resume share repurchases in the current quarter.
Share repurchases have become a big reason why investors buy large bank stocks, so this is certainly a good sign. Let's take a look at how the bank accomplished this and how much stock JPMorgan might be able to repurchase in 2023.
Image source: Getty Images.
Managing capital
Banks have strict capital requirements, even more so for global systemically important banks (GSIB) like JPMorgan. One key regulatory capital ratio to watch is the common equity tier 1 (CET1) capital ratio, which looks at a bank's core capital expressed as a percentage of its risk-weighted assets (RWA) such as loans. Each bank has a different CET1 requirement based on its size and riskiness, and it's the excess capital above this ratio that banks can dip into to pay out dividends and repurchase stock.
There are several components to the CET1 ratio, which can change from year to year. Heading into 2023 and 2024, management at JPMorgan expected to see higher CET1 requirements, so it needed to build capital, which led to the pause in share repurchases. When reporting its third-quarter results, management said it expected to move from a 12.5% CET1 ratio to 13% by the end of the first quarter of this year.
But at the end of the fourth quarter, JPMorgan reported a 13.2% CET1 ratio, exceeding expectations. The CET1 ratio is composed of two things: the numerator, which is capital, and the denominator, which is RWA. In Q4, the bank lowered its RWA and was able to grow capital, largely from retained earnings in the quarter.
How much stock could JPMorgan repurchase?
After stress testing was completed last year, which plays a big role in setting annual CET1 requirements for the largest banks, JPMorgan Chase had a CET1 requirement of 12% for this year. Keep in mind that management likes to also keep a buffer above this level before they feel they can repurchase stock.
Also keep in mind that the Basel Committee on Banking Supervision (BCBS), an international organization that leads the charge on banking regulation, is still more or less tweaking the final bank regulatory capital rules.
The consensus seems to be that JPMorgan could face even higher capital requirements in 2024 and management has said it wants to build to a 13.5% CET1 target by next year.
JPMorgan Chase's CFO Jeremy Barnum said when you think about the bank's earnings power in 2023 and projected dividends, as well as the 13.5% CET1 target, a good number would be roughly $12 billion in share repurchases in 2023. That's a far cry from the more than $18 billion of stock the bank bought back in 2021 but Barnum cautioned that things could certainly change with more information about Basel changes coming out this year.
The importance of repurchases
I think many investors in large bank stocks see share repurchases as a critical part of the story and a key reason they invest. That might explain why JPMorgan moved quickly in Q4 to build capital.
I think the bank has shown that regardless of the capital rules, which always seem to be changing, it is going to find a way to regularly repurchase at least some stock. But that theory will continue to be tested later this year and into 2024 as we find out more about upcoming Basel changes.
