JP Morgan cuts dividend to build capital reserves

JP Morgan cut its quarterly dividend from 38c to 5c a share yesterday, in a bid to build up $5 billion in additional capital reserves.

The bank's chairman Jamie Dimon, speaking in a conference call yesterday, hinted at three possible uses for the capital: debt repayments, as a war chest or as a safety net.

The bank received $25 billion in investment from the US government last year under the Troubled Assets Relief Programme (Tarp), and Dimon said the dividend cut would "help position us to repay Tarp as soon as is prudent, while still maintaining a strong capital position". However, he said, the cut "does not directly relate to Tarp". Dimon told analysts earlier this month that he was confident JP Morgan would be among the first US banks to repay their Tarp loans. The dividend would remain low until the loan was repaid, as Tarp rules do not permit debtor banks to increase their dividends, he added.

Another option, Dimon said, was to use the money for acquisitions. "There will be enormous opportunities in the next two years in acquisitions or in building the business, and we will be in position for that," he explained.

A few days after accepting the Tarp funding in October 2008, JP Morgan was reportedly already considering using the $25 billion investment to fund more takeovers. A bank executive inadvertently told a New York Times reporter on October 17 that the funding would let the bank "be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment."

The third possibility is that JP Morgan is following the lead set by the Treasury and other regulators earlier this month, when they announced plans to raise capital requirements based on stress scenarios far more severe than the current downturn. JP Morgan's action is based on a deep recession: a contraction lasting two years, unemployment over 10%, and an overall 40% drop in house prices, Dimon said. "We must necessarily be prepared to handle a highly stressed environment (although we are not predicting this)," he added.

See also: CAP details expose transatlantic split on capital