Tomorrow afternoon, when the Federal Reserve announces the results of stress tests related to the Dodd-Frank Act, one thing important to every big bank CEO will be on the line: Reputation. For any of the largest U.S. banks, reputation of its brand and balance sheet quality impact borrowing costs and operational success.
The last 12 months have been somewhat of a rollercoaster ride for Jamie Dimon and the reputation of JPMorgan Chase & Co. (NYSE:JPM). In March 2012, while still holding the title of “Obama’s favorite banker,” Dimon successfully guided the bank through the Federal Reserve’s annual stress tests. In typical Dimon-fashion, the charismatic CEO announced the bank’s intention to raise its dividend and initiate $15 billion of share buy-backs before the institution had been given official approval from the Fed. Some saw this as miscommunication; others saw Dimon marching to the beat of his own drum.
From confident to incompetent
After escaping the 2008-2009 financial crisis with one of the strongest balance sheet compared to its troubled peers Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) , investors were not surprised JPMorgan Chase & Co. (NYSE:JPM)’s assets fared well in the Fed’s hypothetically adverse economic scenario, a simulation of a sharp rise in unemployment and 20% decline in housing prices. A very similar scenario was used in this year’s tests, including 4% GDP contraction, +12% unemployment, and +20% drop in home prices. However, the major surprise came in May of 2012, when Dimon held an emergency call to disclose losses of around $2 billion in the firm’s central investing unit which ultimately ballooned to over $6 billion. Investors began to question Dimon’s competence.
Despite the embarrassing loss and ongoing inquiries from Congress, few expect tomorrow’s results to highlight any deficiencies in Dimon’s “fortress balance sheet.” Continual improvement across wholesale and credit card loan portfolios has allowed JPMorgan Chase & Co. (NYSE:JPM), along with its peers, to consistently improve capital ratios throughout the year.