Passing the 'Stress Test' Means This Big Bank Is Strong Today

The Federal Reserve just completed the second round of "stress tests" on the big banks...

After the 2008 financial crisis left America's banks in grave danger, new regulations require banks to undergo these reviews to ensure they have enough capital to withstand another shock to the economy.

And the banks performed well during the latest round of tests... The Fed said that the banks held strong capital levels throughout hypothetical recession scenarios.

Of course, due to the coronavirus pandemic, 2020 has been a real-life "stress test" of its own. The banks excelled here, too.

Federal Reserve Vice Chair Richard Clarida even said that banks had been "a source of strength" throughout 2020. He added that the stress test results confirm that banks can continue lending to households and businesses "even during a sharply adverse future turn in the economy."

In June, the Fed had temporarily barred big banks from increasing their dividends or buying back shares – a move to ensure the banks would be strong enough to weather the COVID-19 pandemic.

Because of the strong results, the Fed eased the restrictions this month. Buybacks and dividend hikes can resume, as long as they don't exceed the bank's net income over the past year.

This is great news for banks, and for the broader economy. But investors have been skeptical about bank stocks. While many sectors of the market are hitting new highs, banks still aren't.

But they're trending higher. And the Fed's approval to begin rewarding shareholders again should increase positive sentiment on big banks like this one...

JPMorgan Chase (NYSE: JPM) dominates the finance industry.

Banks can be a lot of things. They can work with consumers, underwrite public stock offerings, trade for profits, or lend money. Most banks focus on a few key areas and dabble in others.

But JPMorgan is different. It's in the top two or three of nearly every category...

JPMorgan is the biggest bank for consumer loans and credit cards. And it tops the charts in terms of advisory fees for investment banking. When it comes to commercial lending or residential loans, JPMorgan comes in third.

Not only is JPMorgan one of the biggest banks, but it's also one of the most profitable.

The main measure of a bank's profitability is return on equity ("ROE"). In a simplified sense, this measures how much profits the bank earns from the equity its shareholders have contributed to give the bank a capital base. JPMorgan's ROE is 9.5%, beating out nearly every competing bank.

And, as we noted in a previous Stock of the Week on JPMorgan, the company has a great management team. CEO Jamie Dimon has a long track record of being an excellent banking executive. During the Great Recession, Dimon's leadership led to his firm beating the financial sector's performance by nearly eight times.

Having an executive like Dimon can give investors confidence over the company's operations. It means that the bank likely won't take unnecessary risks.

JPMorgan also got some good news out of the Fed's announcement...

And after passing the recent stress tests, the Fed said that JPMorgan was allowed to start rewarding shareholders through dividends and buybacks again. And it didn't wait long... Soon after the Fed's announcement, JPMorgan announced a $30 billion stock buyback program. And it also said that it would maintain its quarterly dividend of $0.90 per share.

Buybacks are a great way to reward shareholders. By repurchasing shares, companies decrease the number of shares outstanding, boosting each share's price.

The announcement sent JPMorgan's shares higher – jumping 3.8% on the news. And this move continues JPMorgan's recent uptrend... Since bottoming with the broader market on March 23, JPM shares have surged more than 50%.

But shares are still more than 10% below their pre-pandemic level. JPMorgan's stock should continue to recover as the economy returns to normal and the company buys back shares.

Sentiment on banks is improving. And the Federal Reserve is leading the charge – saying that banks have been a "source of strength" throughout the pandemic. And JPMorgan is one of the best in the business.

Sometimes investing is simple.