JP Morgan Chase 2005 Annual Report Download - page 38

Management’s discussion and analysis
JPMorgan Chase & Co.
36 JPMorgan Chase & Co. /2005 Annual Report
2005 compared with 2004
Operating earnings of $3.7 billion were up 24%, or $710 million, from the
prior year. The increase was driven by the Merger, higher revenues and an
increased benefit from the Provision for credit losses. These factors were
partially offset by higher compensation expense. Return on equity was 18%.
Net revenue of $14.6 billion was up $2.0 billion, or 16%, over the prior year,
representing the IB’s highest annual revenue since 2000, driven by strong Fixed
Income and Equity Markets and Investment banking fees. Investment banking
fees of $4.1 billion increased 15% from the prior year driven by strong growth
in advisory fees resulting in part from the Cazenove business partnership.
Advisory revenues of $1.3 billion were up 35% from the prior year, reflecting
higher market volumes. Debt underwriting revenues of $2.0 billion increased by
6% driven by strong loan syndication fees. Equity underwriting fees of $864
million were up 11% from the prior year driven by improved market share.
Fixed Income Markets revenue of $7.2 billion increased 15%, or $928 million,
driven by stronger, although volatile, trading results across commodities, emerging
markets, rate markets and currencies. Equities Markets revenues increased 21%
to $1.8 billion, primarily due to increased commissions, which were offset
partially by lower trading results, which also experienced a high level of volatility.
Credit Portfolio revenues were $1.4 billion, up $213 million from the prior year
due to higher gains from loan workouts and sales as well as higher trading
revenue from credit risk management activities.
The Provision for credit losses was a benefit of $838 million compared with
a benefit of $640 million in 2004. The increased benefit was due primarily to
the improvement in the credit quality of the loan portfolio and reflected net
recoveries. Nonperforming assets of $645 million decreased by 46% since
the end of 2004.
Noninterest expense increased 12% to $9.7 billion, largely reflecting higher
performance-based incentive compensation related to growth in revenue.
Noncompensation expense was up 4% from the prior year primarily due to
the impact of the Cazenove business partnership, while the overhead ratio
declined to 67% for 2005, from 69% in 2004.
2004 compared with 2003
In 2004, Operating earnings of $2.9 billion were up 5% from the prior year.
Increases in Investment banking fees, the improvement in the Provision for
credit losses and the impact of the Merger were partially offset by decreases in
trading revenues and net interest income. Return on equity was 17% for 2004.
Total net revenue of $12.6 billion was relatively flat from the prior year,
primarily due to lower Fixed income markets revenues and Credit portfolio
revenues, offset by increases in Investment banking fees and the impact of the
Merger. The decline in revenue from Fixed income markets was driven by weaker
portfolio management trading results, mainly in the interest rate markets busi-
ness. Credit portfolio revenues were down due to lower net interest income,
Investment Bank
JPMorgan Chase is one of the world’s leading investment banks,
as evidenced by the breadth of its client relationships and product
capabilities. The Investment Bank has extensive relationships
with corporations, financial institutions, governments and
institutional investors worldwide. The Firm provides a full range
of investment banking products and services in all major capital
markets, including advising on corporate strategy and structure,
capital raising in equity and debt markets, sophisticated risk
management, and market-making in cash securities and derivative
instruments. The Investment Bank also commits the Firm’s own
capital to proprietary investing and trading activities.
Selected income statement data
Year ended December 31,(a)
(in millions, except ratios) 2005 2004 2003
Revenue
Investment banking fees:
Advisory $ 1,263 $ 938 $ 640
Equity underwriting 864 781 699
Debt underwriting 1,969 1,853 1,532
Total investment banking fees 4,096 3,572 2,871
Trading-related revenue:
Fixed income and other 5,673 5,008 6,016
Equities 350 427 556
Credit portfolio 116 6 (186)
Total trading-related revenue(b) 6,139 5,441 6,386
Lending & deposit related fees 594 539 440
Asset management, administration
and commissions 1,724 1,400 1,217
Other income 615 328 103
Noninterest revenue 13,168 11,280 11,017
Net interest income(b) 1,410 1,325 1,667
Total net revenue(c) 14,578 12,605 12,684
Provision for credit losses (838) (640) (181)
Credit reimbursement from (to) TSS(d) 154 90 (36)
Noninterest expense
Compensation expense 5,785 4,893 4,462
Noncompensation expense 3,954 3,803 3,840
Total noninterest expense 9,739 8,696 8,302
Operating earnings before
income tax expense 5,831 4,639 4,527
Income tax expense 2,173 1,691 1,722
Operating earnings $ 3,658 $ 2,948 $ 2,805
Financial ratios
ROE 18% 17% 15%
ROA 0.61 0.62 0.64
Overhead ratio 67 69 65
Compensation expense as
% of total net revenue 40 39 35
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) Trading revenue, on a reported basis, excludes the impact of Net interest income related to IB’s
trading activities; this income is recorded in Net interest income. However, in this presentation, to
assess the profitability of IB’s trading business, the Firm combines these revenues for segment
reporting purposes.The amount reclassified from Net interest income to Trading revenue was
$0.2 billion, $1.9 billion and $2.1 billion for 2005, 2004 and 2003, respectively. The decline from
prior years is due to tightening spreads as short-term funding rates have risen sharply and also, to
a lesser extent, increased funding costs from growth in noninterest-bearing trading assets.
(c) Total net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income
from municipal bond investments and income tax credits related to affordable housing invest-
ments, of $752 million, $274 million and $117 million for 2005, 2004 and 2003, respectively.
(d) TSS is charged a credit reimbursement related to certain exposures managed within the
IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit
reimbursement on page 35 of this Annual Report.
The following table provides the IB’s total net revenue by business segment:
Year ended December 31,(a)
(in millions) 2005 2004 2003
Revenue by business
Investment banking fees $ 4,096 $ 3,572 $ 2,871
Fixed income markets 7,242 6,314 6,987
Equities markets 1,799 1,491 1,406
Credit portfolio 1,441 1,228 1,420
Total net revenue $ 14,578 $12,605 $12,684
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.