Risk Management

Will a Forecast Discrepancy Hurt JPMorgan Chase?

If there were a severe economic shock, JPMorgan Chase's revenue would be much lower, says the Federal Reserve, than the bank itself is forecasting.
Katie Kuehner-HebertMarch 10, 2015

Analysts for JPMorgan Chase are growing increasingly concerned about the wide gap between the Federal Reserve’s stress test projections and the money-center bank’s own forecast of the revenue it would record if there were a severe economic shock.

While the Fed in its stress tests projected much lower revenue for six of the largest banks than the banks themselves did, analysts are most worried about the gap for JPMorgan.

The central bank estimated the financial institution’s pre-provision net revenue over a nine-quarter period following a severe economic shock would be $30.4 billion, or 38% less than JPM’s own estimate of $49.5 billion, according to an American Banker article on Monday.

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

Analysts are getting increasingly anxious over how to interpret whether the gap could significant impact the Fed’s ultimate grade for the company.

“What does this mean? Frankly, we don’t know,” CLSA analyst Mike Mayo told the American Banker. “It is certainly not good. I’m just not sure where on the not-good scale it goes.”

The Fed’s comprehensive capital analysis and review (CCAR) on JPMorgan is slated to be published Wednesday, and analysts are looking to see whether the company would be able to return as much capital to shareholders as expected, considering the Fed has projected a smaller revenue base to absorb losses, the American Banker wrote.

Analysts are also concerned whether the gap between the Fed and JPMorgan’s estimates could cause the company to fail the CCAR on qualitative grounds.

“This does make me worry a little, because I think it makes you open to criticism if your model is significantly different from theirs,” Macquarie Capital analyst David Konrad told American Banker. “You don’t want to be that far off from the Fed.”

Most of the analysts interviewed said that the gap was most likely caused by differences in methodology, though it was difficult to tell for sure because “the stress-testing process is clandestine,” the American Banker wrote.

“The test is designed to be so subjective and speculative and it is driving the banks to terror. … You have to tell us where these numbers come from,” Christopher Whalen, senior managing director of Kroll Bond Rating Agency, told the newspaper. “To me, this whole process is a circus that gets a lot of attention but has no analytical value.”

4 Powerful Communication Strategies for Your Next Board Meeting