JPMorgan sheds holdings to appease regulators

JPMorgan Chase & Co , which has grown by more than 50% since the start of the financial crisis, is going on a diet. The largest US bank is shedding holdings to appease regulators including the Federal Reserve. If the bank gets rid of enough trading assets, derivatives, and investment securities, it can be deemed a little less risky by the Fed, which in turn could help it boost profitability and return more capital to shareholders.

JPMorgan's efforts underscore the extent to which regulators are influencing banks' business decisions after the financial crisis cost the global economy trillions of dollars. In the first nine months of the year, the bank returned $150 billion of deposits to customers, largely hedge funds that were parking money not immediately needed for trading. The bank is hoping to shed more assets over time, and may also look to do less trading business with other financial institutions and more with companies, which would allow regulators to view it as less risky.

"We made great progress," said Marianne Lake, JPMorgan's chief financial officer, adding, "it becomes increasingly more difficult" to make progress in cutting assets from here. By the Fed's formula, JPMorgan is the US bank whose failure would be the most catastrophic for the financial system because of its size, complexity, and connections to other lenders and institutions.

The bank said on Tuesday its assets shrank by $32.48 billion, or 1.3%, in the third quarter from the second quarter, to $2.42 trillion. In the second quarter, its assets fell by 4.9%. This marks the first time JPMorgan's assets have declined for two quarters in a row since 2009. JPMorgan's efforts in the first half of the year alone could allow it to buy back as much as $3 billion more in shares, or about 1.5% of the outstanding total, according to a report last week from Susan Roth Katzke, a bank stock analyst at Credit Suisse. By buying back more shares, the bank could increase its 2016 return on equity, a key measure of how effectively it wrings profits from shareholders' funds, to 10.9% from 10.8%, by her estimate. Another analyst, Steven Chubak of Nomura, reckons that the bank's moves could lift its share price by $2.

JPMorgan shares fell 1.6% to $60.55 in extended trading on Tuesday after the bank posted results. The biggest US banks grew much bigger during the financial crisis as they swallowed up rivals that came close to failing, such as Bear Stearns and Merrill Lynch.

JPMorgan Chase's assets are now almost 60% higher than they were pre-crisis. But in recent years regulators have been crafting new rules to help ensure that bigger banks do not create too much risk for the financial system. One of those rules, known as capital surcharges for globally systemically important banks, essentially forces banks that are too complicated to swallow higher costs: the banks must fund their operations with less debt, which is cheaper, and more equity, which is more costly.

In addition to returning deposits to hedge funds, the bank also offloaded some $10 billion of unspecified hard-to-value assets in the second quarter, according to company filings, and uncluttered its derivatives books. Those efforts should allow the bank to hold down the amount of equity it funds itself with and reduce its costs. Before the second quarter and under current rules, JPMorgan needed to fund at least 12% of its total adjusted assets with equity, and the rest with debt. That equity ratio is at least 4.5% points higher than for smaller lenders, and adjusts assets for how risky they are. After slimming down, the bank expects to be able to fund itself with just 4% points more equity than smaller lenders.

Making more cuts will not be easy, because the bank has picked the low-hanging fruit by scaling down clearly unprofitable client relationships, and it does not want to alienate valued customers.

"Going out to your clients and saying we don't want your money is a very funny thing for a bank to do," JPMorgan Chief Executive Jamie Dimon said at a conference last month.

On a call with analysts on Tuesday, Dimon said the bank could make more progress on its capital surcharge ratios in the next five to six years. Even as JPMorgan sheds some assets, it is willing to take on others. For example, JPMorgan is pouring technology and marketing dollars into credit cards. It is pushing rewards programs to encourage spending by cardholders and it is promoting transaction processing services for merchants, two businesses that bring in high fees and have relatively low capital needs. The bank is likely to promote corporate treasury and cash management services, as well as asset management, for similar reasons, Katzke said.