JP Morgan Chase 2005 Annual Report Download - page 41

JPMorgan Chase & Co. /2005 Annual Report 39
Retail Financial Services
RFS includes Home Finance, Consumer & Small Business Banking,
Auto & Education Finance and Insurance. Through this group of
businesses, the Firm provides consumers and small businesses
with a broad range of financial products and services including
deposits, investments, loans and insurance. Home Finance is a
leading provider of consumer real estate loan products and is
one of the largest originators and servicers of home mortgages.
Consumer & Small Business Banking offers one of the largest
branch networks in the United States, covering 17 states with
2,641 branches and 7,312 automated teller machines (“ATMs”).
Auto & Education Finance is the largest noncaptive originator of
automobile loans as well as a top provider of loans for college
students. Through its Insurance operations, the Firm sells and
underwrites an extensive range of financial protection products
and investment alternatives, including life insurance, annuities
and debt protection products.
Selected income statement data
Year ended December 31,(a)
(in millions, except ratios) 2005 2004 2003
Revenue
Lending & deposit related fees $ 1,452 $ 1,013 $ 486
Asset management, administration
and commissions 1,498 1,020 459
Securities /private equity gains (losses) 9(83) 381
Mortgage fees and related income 1,104 866 803
Credit card income 426 230 107
Other income 136 31 (28)
Noninterest revenue 4,625 3,077 2,208
Net interest income 10,205 7,714 5,220
Total net revenue 14,830 10,791 7,428
Provision for credit losses(b) 724 449 521
Noninterest expense
Compensation expense 3,337 2,621 1,695
Noncompensation expense 4,748 3,937 2,773
Amortization of intangibles 500 267 3
Total noninterest expense 8,585 6,825 4,471
Operating earnings before
income tax expense 5,521 3,517 2,436
Income tax expense 2,094 1,318 889
Operating earnings $ 3,427 $ 2,199 $1,547
Financial ratios
ROE 26% 24% 37%
ROA 1.51 1.18 1.05
Overhead ratio 58 63 60
(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) 2005 includes a $250 million special provision related to Hurricane Katrina allocated as
follows: $140 million in Consumer Real Estate Lending, $90 million in Consumer & Small
Business Banking and $20 million in Auto & Education Finance.
2005 compared with 2004
Operating earnings were $3.4 billion, up $1.2 billion from the prior year. The
increase was due largely to the Merger but also reflected increased deposit
balances and wider spreads, higher home equity and subprime mortgage
balances, and expense savings in all businesses. These benefits were partially
offset by narrower spreads on retained loan portfolios, the special provision
for Hurricane Katrina and net losses associated with portfolio loan sales in
the Home Finance and Auto businesses.
Net revenue increased to $14.8 billion, up $4.0 billion, or 37%, due primarily
to the Merger. Net interest income of $10.2 billion increased by $2.5 billion
as a result of the Merger, increased deposit balances and wider spreads, and
growth in retained consumer real estate loans. These benefits were offset
partially by narrower spreads on loan balances and the absence of loan port-
folios sold in late 2004 and early 2005. Noninterest revenue of $4.6 billion
increased by $1.5 billion due to the Merger, improved MSR risk management
results, higher automobile operating lease income and increased banking
fees. These benefits were offset in part by losses on portfolio loan sales in the
Home Finance and Auto businesses.
The Provision for credit losses totaled $724 million, up $275 million, or 61%,
from 2004. Results included a special provision in 2005 for Hurricane Katrina
of $250 million and a release in 2004 of $87 million in the Allowance for
loan losses related to the sale of the manufactured home loan portfolio.
Excluding these items, the Provision for credit losses would have been down
$62 million, or 12%. The decline reflected reductions in the Allowance for
loan losses due to improved credit trends in most consumer lending portfolios
and the benefit of certain portfolios in run-off. These reductions were partially
offset by the Merger and higher provision expense related to the decision to
retain subprime mortgage loans.
Noninterest expense rose to $8.6 billion, an increase of $1.8 billion from the
prior year, due primarily to the Merger. The increase also reflected continued
investment in retail banking distribution and sales, increased depreciation
expense on owned automobiles subject to operating leases and a $40 million
charge related to the dissolution of a student loan joint venture. Expense
savings across all businesses provided a favorable offset.
2004 compared with 2003
Operating earnings were $2.2 billion, up from $1.5 billion a year ago. The
increase was due largely to the Merger. Excluding the benefit of the Merger,
earnings declined as lower MSR risk management results and reduced prime
mortgage production revenue offset the benefits of growth in loan balances,
wider spreads on deposit products and improvement in credit costs.
Total net revenue increased to $10.8 billion, up 45% from the prior year. Net
interest income increased by 48% to $7.7 billion, primarily due to the Merger,
growth in retained loan balances and wider spreads on deposit products.
Noninterest revenue increased to $3.1 billion, up 39%, due to the Merger
and higher mortgage servicing income. Both components of total revenue
included declines associated with risk managing the MSR asset and lower
prime mortgage originations.
The Provision for credit losses was down 14% to $449 million despite the
impact of the Merger. The effect of the Merger was offset by a reduction in the
Allowance for loan losses resulting from the sale of the manufactured home
loan portfolio, and continued positive credit quality trends in the consumer
lending businesses.
Noninterest expense totaled $6.8 billion, up 53% from the prior year,
primarily due to the Merger and continued investment to expand the branch
network. Partially offsetting the increase were merger-related expense savings
in all businesses.