JPMorgan to Redeem $9B TruPS
Following last week’s announcement of new capital rules by the Federal Reserve, JPMorgan Chase & Co. (JPM) has announced that it will redeem about $9 billion in trust preferred securities (TruPS). As per the new capital proposal, the TruPS issued prior to May 19, 2010 would no longer qualify for Tier 1 capital ratio calculations beginning 2013.
The redemption includes $5.7 billion worth of capital securities related to different series and Fixed-to-Floating Rate Capital Securities worth $3.3 billion. JPMorgan stated that all these securities will be redeemed at 100% of the liquidation amount. The redemption amount will also include accrued and unpaid distributions until the redemption date.
JPMorgan further mentioned that it will use the existing available cash to fund these redemptions. The redemptions will take place on July 12, 2012.
Previously, in March, JPMorgan had announced the redemption of about $425 million in TruPS. These included 17 million of 7.20% preferred securities, issued by BANK ONE Capital VI.
During mid-March, the Federal Reserve informed JPMorgan that its capital deployment plan, submitted under Comprehensive Capital Analysis and Review (CCARF) or the stress test, has been approved. Consequently, the company announced a dividend increase and a new share repurchase authorization. The redemption of TruPS followed this approval.
In May, in its quarterly regulatory filing, JPMorgan stated that its chief investment office (:CIO) incurred nearly $2 billion mark-to-market losses during the first six weeks of the current quarter in its synthetic credit portfolio. This portfolio was to protect the company against the potential losses on its large holdings of loans, deposits and bonds.
However, the company’s strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed. Yet, the clearance of the stress test is a testimony of JPMorgan’s solid capital position. With its proven cash generating capacities, the company remains committed to its shareholders by enhancing their wealth through dividend hikes and share buybacks.
Last week, among JPMorgan’s peers- SunTrust Banks Inc. (STI) also stated that it will be redeeming TruPS worth approximately $1.19 billion. The redemption includes SunTrust Capital VIII 6.1% TruPS with maturity date of December 15, 2036 and SunTrust Capital IX 7.875% TruPS maturing on March 15, 2068.
Another peer, Citigroup Inc. (C), whose extra capital deployment request was rejected by the Fed, announced that it would not request for any additional capital deployment while re-submitting its capital plan to the Fed. Citigroup would continue to pay its current dividend of 1 cent per share. Similar to JPMorgan, Citigroup has also announced the redemption of TruPS.
Redeeming TruPS will enable banks to bring down their interest expenses, as these securities demand higher rates than other securities. Moreover, according to Dodd-Frank Act, banks will no longer be able to consider these securities as regulatory capital from 2013.
JPMorgan currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
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