JP Morgan Chase 2005 Annual Report Download - page 47

JPMorgan Chase & Co. /2005 Annual Report 45
Card Services
Card Services is one of the largest issuers of credit cards in the
United States, with more than 110 million cards in circulation,
and is the largest merchant acquirer. CS offers a wide variety
of products to satisfy the needs of its cardmembers, including
cards issued on behalf of many well-known partners, such
as major airlines, hotels, universities, retailers and other
financial institutions.
JPMorgan Chase uses the concept of “managed receivables” to evaluate
the credit performance of the underlying credit card loans, both sold and not
sold: as the same borrower is continuing to use the credit card for ongoing
charges, a borrower’s credit performance will affect both the receivables
sold under SFAS 140 and those not sold. Thus, in its disclosures regarding
managed receivables, JPMorgan Chase treats the sold receivables as if they
were still on the balance sheet in order to disclose the credit performance
(such as net charge-off rates) of the entire managed credit card portfolio.
Operating results exclude the impact of credit card securitizations on revenue,
the Provision for credit losses, net charge-offs and receivables. Securitization
does not change reported Net income versus operating earnings; however, it
does affect the classification of items on the Consolidated statements of income.
Selected income statement data – managed basis
Year ended December 31,(a)(b)
(in millions, except ratios) 2005 2004 2003
Revenue
Asset management,
administration and commissions $—$ 75 $ 108
Credit card income 3,351 2,179 930
Other income 212 117 54
Noninterest revenue 3,563 2,371 1,092
Net interest income 11,803 8,374 5,052
Total net revenue 15,366 10,745 6,144
Provision for credit losses(c) 7,346 4,851 2,904
Noninterest expense
Compensation expense 1,081 893 582
Noncompensation expense 3,170 2,485 1,336
Amortization of intangibles 748 505 260
Total noninterest expense 4,999 3,883 2,178
Operating earnings before
income tax expense 3,021 2,011 1,062
Income tax expense 1,114 737 379
Operating earnings $ 1,907 $ 1,274 $ 683
Memo: Net securitization
gains (amortization) $56$ (8) $ 1
Financial metrics
ROE 16% 17% 20%
Overhead ratio 33 36 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) As a result of the integration of Chase Merchant Services and Paymentech merchant
processing businesses into a joint venture, beginning in the fourth quarter of 2005, Total
net revenue, Noninterest expense and pre-tax earnings have been reduced to reflect the
deconsolidation of Paymentech.There is no impact to operating earnings.
(c) 2005 includes a $100 million special provision related to Hurricane Katrina.
2005 compared with 2004
Operating earnings of $1.9 billion were up $633 million, or 50%, from the
prior year due to the Merger. In addition, lower expenses driven by merger
savings, stronger underlying credit quality and higher revenue from increased
loan balances and charge volume were partially offset by the impact of
increased bankruptcies.
Net revenue was $15.4 billion, up $4.6 billion, or 43%. Net interest income
was $11.8 billion, up $3.4 billion, or 41%, primarily due to the Merger, and
the acquisition of a private label portfolio. In addition, higher loan balances
were partially offset by narrower loan spreads and the reversal of revenue
related to increased bankruptcies. Noninterest revenue of $3.6 billion was up
$1.2 billion, or 50%, due to the Merger and higher interchange income from
higher charge volume, partially offset by higher volume-driven payments to
partners, higher expense related to rewards programs and the impact of the
deconsolidation of Paymentech.
The Provision for credit losses was $7.3 billion, up $2.5 billion, or 51%,
primarily due to the Merger, and included the acquisition of a private label
portfolio. The provision also increased due to record bankruptcy-related net
charge-offs resulting from the new bankruptcy legislation, which became
effective on October 17, 2005. Finally, the Allowance for loan losses was
increased in part by the special provision for credit losses related to Hurricane
Katrina. These factors were partially offset by lower contractual net charge-offs.
Despite a record level of bankruptcy losses, the net charge-off rate improved.
The managed net charge-off rate was 5.21%, down from 5.27% in the prior
year. The 30-day managed delinquency rate was 2.79%, down from 3.70%
in the prior year, driven primarily by accelerated loss recognition of delinquent
accounts as a result of the bankruptcy reform legislation and strong underlying
credit quality.
Noninterest expense of $5.0 billion increased by $1.1 billion, or 29%, primarily
due to the Merger, which included the acquisition of a private label portfolio.
Merger savings, including lower processing and compensation costs and the
impact of the deconsolidation of Paymentech, were partially offset by higher
spending on marketing.
2004 compared with 2003
Operating earnings of $1.3 billion increased by $591 million compared with
the prior year, primarily due to the Merger. In addition, earnings benefited
from higher loan balances and charge volume, partially offset by a higher
Provision for credit losses and higher expenses.
Total net revenue of $10.7 billion increased by $4.6 billion. Net interest
income of $8.4 billion increased by $3.3 billion, primarily due to the Merger
and higher loan balances. Noninterest revenue of $2.4 billion increased by
$1.3 billion, primarily due to the Merger and increased interchange income
resulting from higher charge-off volume. These factors were partially offset by
higher volume-driven payments to partners, reflecting the sharing of income
and increased rewards expense.
The Provision for credit losses of $4.9 billion increased by $1.9 billion, primarily
due to the Merger and growth in credit card receivables. Credit ratios remained
strong, benefiting from reduced contractual and bankruptcy charge-offs. The
net charge-off ratio was 5.27%. The 30-day delinquency ratio was 3.70%.
Noninterest expense of $3.9 billion increased by $1.7 billion, primarily related
to the Merger. In addition, expenses increased due to higher marketing
expenses and volume-based processing expenses, partially offset by lower
compensation expenses.