JP Morgan Chase 2005 Annual Report Download - page 49

JPMorgan Chase & Co. /2005 Annual Report 47
Commercial Banking
Commercial Banking serves more than 25,000 clients, including
corporations, municipalities, financial institutions and not-for-
profit entities with annual revenues generally ranging from
$10 million to $2 billion. While most Middle Market clients are
within the Retail Financial Services footprint, CB also covers
larger corporations, as well as local governments and financial
institutions on a national basis. CB is a market leader with supe-
rior client penetration across the businesses it serves. Local mar-
ket presence, coupled with industry expertise and excellent
client service and risk management, enable CB to offer superior
financial advice. Partnership with other JPMorgan Chase busi-
nesses positions CB to deliver broad product capabilities –
including lending, treasury services, investment banking, and
asset and wealth management – and meet its clients’ financial
needs.
Selected income statement data
Year ended December 31,(a)
(in millions, except ratios) 2005 2004 2003
Revenue
Lending & deposit related fees $ 575 $ 441 $ 301
Asset management, administration
and commissions 60 32 19
Other income(b) 351 209 73
Noninterest revenue 986 682 393
Net interest income 2,610 1,692 959
Total net revenue 3,596 2,374 1,352
Provision for credit losses(c) 73 41 6
Noninterest expense
Compensation expense 661 465 285
Noncompensation expense 1,146 843 534
Amortization of intangibles 65 35 3
Total noninterest expense 1,872 1,343 822
Operating earnings before income
tax expense 1,651 990 524
Income tax expense 644 382 217
Operating earnings $ 1,007 $ 608 $ 307
Financial ratios
ROE 30% 29% 29%
ROA 1.78 1.67 1.87
Overhead ratio 52 57 61
(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) IB-related and commercial card revenues are included in Other income.
(c) 2005 includes a $35 million special provision related to Hurricane Katrina.
Commercial Banking operates in 10 of the top 15 major U.S. metropolitan
areas and is divided into three customer segments: Middle Market Banking,
Mid-Corporate Banking and Real Estate. General coverage for corporate
clients is provided by Middle Market Banking, which covers clients with annual
revenues generally up to $500 million. Mid-Corporate Banking covers clients
with annual revenues generally ranging between $500 million and $2 billion
and focuses on clients that have broader investment banking needs. The third
segment, Real Estate, serves investors in, and developers of, for-sale housing,
multifamily rental, retail, office, and industrial properties. In addition to these
three customer segments, Commercial Banking offers several products to the
Firm’s entire customer base: Chase Business Credit, the #1 asset-based lender
for 2005, provides asset-based financing, syndications, and collateral analysis,
and Chase Equipment Leasing offers a variety of equipment finance and leas-
ing products, with specialties in aircraft finance, public sector, and information
technology. Given this structure, Commercial Banking manages a customer
base and loan portfolio that is highly diversified across a broad range of
industries and geographic locations.
2005 compared with 2004
Operating earnings of $1.0 billion were up $399 million from the prior year,
primarily due to the Merger.
Net revenue of $3.6 billion increased by $1.2 billion, or 51%, primarily as a
result of the Merger. In addition to the overall increase from the Merger, Net
interest income of $2.6 billion was positively affected by wider spreads on
higher volume related to liability balances and increased loans, partially offset
by narrower loan spreads. Noninterest revenue of $986 million was lower due
to a decline in deposit-related fees due to higher interest rates, partially offset
by increased investment banking revenue.
Each business within Commercial Banking demonstrated revenue growth
over the prior year, primarily due to the Merger. Middle Market revenue was
$2.4 billion, an increase of $870 million over the prior year; Mid-Corporate
Banking revenue was $548 million, an increase of $181 million; and Real
Estate revenue was $534 million, up $166 million. In addition to the Merger,
revenue was higher for each business due to wider spreads and higher volume
related to liability balances and increased investment banking revenue,
partially offset by narrower loan spreads.
Provision for credit losses of $73 million increased by $32 million, primarily
due to a special provision related to Hurricane Katrina, increased loan balances
and refinements in the data used to estimate the allowance for credit
losses. The credit quality of the portfolio was strong with net charge-offs of
$26 million, down $35 million from the prior year, and nonperforming
loans of $272 million, down $255 million.
Noninterest expense of $1.9 billion increased by $529 million, or 39%,
primarily due to the Merger and to an increase in allocated unit costs for
Treasury Services products.
2004 compared with 2003
Operating earnings were $608 million, an increase of 98%, primarily due
to the Merger.
Total net revenue was $2.4 billion, an increase of 76%, primarily due to the
Merger. In addition to the overall increase related to the Merger, Net interest
income of $1.7 billion was positively affected by higher liability balances,
partially offset by lower lending-related revenue. Noninterest revenue of
$682 million was positively affected by higher investment banking fees and
higher gains on the sale of loans and securities acquired in satisfaction of
debt, partially offset by lower deposit-related fees, which often decline as
interest rates rise.
The Provision for credit losses was $41 million, an increase of $35 million,
primarily due to the Merger. Excluding the impact of the Merger, the provision
was higher in 2004. Lower net charge-offs in 2004 were partially offset by
smaller reductions in the allowance for credit losses in 2004 relative to 2003.