JP Morgan chief executive Jamie Dimon warned in his annual shareholder letter that the US bank’s earnings “will be down meaningfully in 2020” as a result of the coronavirus pandemic, following a record year in 2019.
JP Morgan, as well as its large rivals, is currently undergoing the Federal Reserve's annual stress test to see how well they can withstand a severe economic downturn. They are also preparing for a real life stress test in response to the pandemic and the recession it has caused.
Dimon said JP Morgan is well prepared for global recession, but if the severity of the downturn reached critical levels the bank may be forced to take actions to defend it capital, including cutting its dividend.
Running stress tests for an extremely adverse scenario - assuming a contraction of gross domestic product of 35% and US unemployment peaking at 14% in the fourth quarter - JP Morgan’s board would likely consider suspending the dividend, Dimon said.
"If the board suspended the dividend, it would be out of extreme prudence and based upon continued uncertainty over what the next few years will bring,” he said.
Even under the adverse scenario, JP Morgan would still end the year with strong liquidity and common equity Tier 1 capital of US$170bn, giving it a CET1 ratio of about 9.5%.
JP Morgan, along with its largest banking rivals, halted their stock buyback programs in March, but left their dividends intact.
"Halting buybacks was simply a very prudent action – we don't know exactly what the future will hold – but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008," Dimon said.
He said the closer the extremely adverse scenario in the economy gets, the more likely current regulatory constraints will limit additional actions the bank can take to help clients – in spite of the extraordinary amount of capital and liquidity it could deploy.
Dimon said while JP Morgan had not requested any regulatory relief during the current crisis it does not mean the government shouldn’t change some rules and regulations. "Some rules can improperly prevent healthy, well-capitalized banks from lending freely in times of stress,” he said. "This can hurt customers as the crisis deepens. Leaving high-quality, available liquidity undeployed in times of need is an opportunity forever lost."