The Scenario in Which JPMorgan Cuts Its Dividend
Can banks maintain their current dividends after what could be an extremely dicey second quarter? What about JPMorgan Chase (NYSE: JPM), the biggest U.S. bank? To answer that question, we'll need to see what would happen if JPMorgan fell below a certain threshold on a key regulatory standard -- the common equity tier 1 capital (CET1) ratio.
The CET1 ratio is a measure of a bank's core capital compared to its total risk-weighted assets, expressed as a percentage. It shows us a bank's ability to withstand financial distress, and it can give income investors a hint as to whether the bank will be able to continue paying its normal dividend.
Being the largest bank in the U.S., JPMorgan must maintain higher capital levels than every other U.S. bank. If its CET1 ratio falls below 10.5%, that would trigger regulatory restrictions regarding how much it can pay out to shareholders. In the first quarter of this year, JPMorgan's CET1 ratio fell to 11.5%, down from 12.4% three months earlier. If its CET1 ratio falls below 10.5% after the second quarter and the bank doesn't report roughly $1 billion in net income -- a little over a third of what it reported in Q1 -- I think it may be forced to cut its dividend.
Source Fool.com
