(By Mani) JPMorgan Chase & Co. (NYSE: JPM) expects to reach 9 percent to 9.5 percent Basel III Tier 1 Common by year-end 2013 and still have substantial opportunities for capital returns, especially a special dividend.
CEO Jamie Dimon remains confident that the firm is well positioned to capitalize on the franchise's capital markets strengths, despite a great deal of uncertainty around the long-term outlook for these businesses.
As far as share repurchases and potential price sensitivity, JPMorgan indicated there was appetite to repurchase shares at a moderate premium to trailing book value (TBV), and buybacks could be generally attractive for some banks at roughly 1.5x TBV. However, at valuations north of 2x, JPMorgan is more likely to pursue a special dividend than a buyback.
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"We currently forecast JPM will buyback $10.5 billion in 2013, but this estimate could prove conservative, particularly given the Fed's approval of a $3 billion 1Q13 buyback," UBS analyst Brennan Hawken said in a note to clients.
Notably, in last year's Comprehensive Capital Analysis and Review (CCAR), the Fed approved the company's request for a $12 billion share buyback in 2012 and combined with dividends, this represented over 90 percent of 2012 consensus earnings expectations at the time.
"For 2013, our current capital return assumptions represent 78% of consensus expectations, while a $12 billion buyback would increase the payout ratio to 86%. Including our estimated share buybacks for 2013, we project JPM can grow capital to 9.3% by the end of next year," the analyst said.
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Both of these payouts seem reasonable given last year's approved request, JPMorgan could repurchase a considerable amount of shares next year.
Meanwhile, Dimon seemed confident in the bank's ability to return plenty of capital to shareholders and still grow its regulatory capital ratios to near the minimum required levels.
"Interestingly, JPM only plans to run at a buffer to the required 9.5% level to compensate for potential volatility in AOCI," Hawken said.
Moreover, JPMorgan expects all the US bulge bracket firms will ultimately run at a roughly 10 percent capital level, as firms that run at lower capital ratios run the risk of losing customers to better capitalized firms.
"Separately, it is our sense that funding markets could impose higher spreads on firms that consistently run at lower regulatory capital levels," Hawken noted.
JPMorgan Chase is one of the largest banking institutions in the US, with $2.3 trillion in assets and operations in more than 60 countries. It operates more than 5,500 bank branches and 17,200 ATMs across a 23-state footprint. JPMorgan also offers a full range of investment banking products and services in all major capital markets. Card Services is one of the nation's largest credit card issuers, with over $132 billion in loans and over 65 million open accounts. It supervises assets worth $1.9 trillion and is a global leader in investment and wealth management.