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Stress Test Disclosure: How did JPMorgan Chase Perform?

JPMorgan Chase and Co. [1] released its 2017 Mid-Cycle Stress Test Disclosure this past week, in accordance with regulation issued by the Board of Governors of the Federal Reserve. JPMorgan Chase, also recognized as “firm” is subject to such tests under requirements from the Dodd-Frank Act stress test (DFAST). The results reflect forecasted financial measures for the nine-quarter projection period (Q3 2017 through Q3 2019) under a Severe Adverse scenario which is developed by the firm’s economists.

This Severely Adverse Scenario covers outcomes more adverse than expected in several key economic variables, including U.S. real GDP, U.S. inflation rate and U.S. unemployment rate, real estate prices, equity markets, short-term and long-term rates, credit spreads, and international component recessions in the Euro area, UK, Japan, and developing Asia.

It’s worth noting the firm recognizes a 5.2 percent decline in real U.S. GDP as a severely adverse scenario, as well as the annualized rate of change in the Consumer Price Index dropping from -0.1 percent in Q2 2017 to -2.7 percent in Q4 2017. The unemployment rate increasing by 5.0 percent in Q2 2017 to 9.3 percent in Q2 2019 and house prices declining 22 percent through Q2 2019 relative to their level in Q2 of 2017 are also both considered severely adverse, according to economists from the firm.     

Capital and Risk-Weighted Assets (RWA)

The common equity tier 1 capital ratio had an actual Q2 2017 amount of 12.6 percent. The 2017 Mid-Cycle /Regulatory Minimums from 2017 to Q3 2019 remained at 4.5 percent, with a stressed capital ratio in Q3 2019 at 8.8 percent and a minimum of 7.9 percent.

Total risk-based capital ratio had an actual Q2 2017 amount of 16.4 percent with Mid-Cycle/Regulatory Minimums remaining at 8.0 percent from 2017 to Q3 2019. The stressed capital ratios of Q3 2019 measured at 12.9 percent and the minimum measured at 11.4 percent.  

The actual Q2 2017 RWA measured at $1.48 billion and the projected Q3 2019 RWA was $1.5 billion.

Profit and Loss Projections

Pre-provision net revenue measured $54.2 billion with 2.2 percent of average assets. Provision for loan and lease losses measured $58.1 billion and trading and counterparty losses measured $28.3 billion. This makes the net income before taxes $35.4 billion which is 1.4 percent of average assets.  

Loan Loss Projections

First lien domestic mortgages projected a loss of $44.4 billion with a portfolio loss rate of 5.0 percent, while junior liens and domestic home equity lines of credit (HELOCs) measured $3.6 billion with a portfolio loss rate of 1.5 percent. According to the report, loan losses and loss rates are calculated to be consistent with the Federal Reserve’s methodology. This includes impairments in the purchased credit-impaired (PCI) portfolios as post of loan losses and not included as part of loan loss reserves.  

To see the report in full, click here [2].