Universal banking giant JPMorgan Chase (NYSE:JPM) is cleaning up its balance sheet in the wake of the upcoming new U.S. capital requirements. As per a Financial Times report, the financial institution is pacing up to securitize more of its loans so as to reduce the need for additional capital reserves as a buffer. The new regulatory capital norms are proposed to ensure that large banks and lenders have enough capital to support any unforeseen events.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
The proposed framework requires that banks hold an additional $2 for every $100 of risk-weighted assets (RWA). Higher capital locked in the regulatory framework means the bank will have reduced liquidity available for lending. At earlier events, JPM CEO Jamie Dimon criticized the proposal, warning that such measures would make bank stocks unattractive.
Capital Adequacy Norms Ensure Bank’s Health
The recent banking crisis led by the failure of regional bank Silicon Valley has ushered in a renewed fear of the systemic risk that stems from the failure of banking firms. Capital requirements such as the Basel norms are meant so that banks will maintain adequate capital against their RWA, such as loans and securities. The additional capital is used to absorb losses in times of need.
As of June 30, 2023, JPMorgan had $1.3 trillion in loans on its balance sheet. The report indicates that JPMorgan is securitizing a larger proportion of loans than it typically does in order to avoid the need for additional capital requirements. Importantly, JPM is securitizing loans from its retail business, including mortgages, auto lending, and credit card loans.
Securitization is a process in which lenders bundle together certain forms of illiquid loans or mortgages into a tradable asset. The interest and principal payments from the underlying assets are passed on to the purchaser of the new bundled asset. The process helps reduce the percentage of RWA on the balance sheet.
Is JPM a Buy, Hold, or Sell?
Wall Street analysts are cautiously optimistic about JPM stock. Recently, Morgan Stanley analyst Betsy Graseck increased the price target on JPM to $187 from $179 while keeping a Buy rating. At the same time, Goldman Sachs analyst Richard Ramsden cut the price target to $165 from $176 and maintained a Buy rating.
Of the 16 Top Analysts who recently rated JPM stock, 11 have given it a Buy rating, while five have given it a Sell rating. Top Wall Street analysts are those awarded higher stars by the TipRanks Star Ranking System. This is based on an analyst’s success rate, average return per rating, and statistical significance (number of ratings).
Based on these views, JPMorgan stock has a Moderate Buy consensus rating on TipRanks. Also, the average JPMorgan Chase price forecast of $169.93 implies 18.5% upside potential from current levels. Meanwhile, JPM stock has gained 8.5% so far this year.
