JP Morgan Chase 2005 Annual Report Download - page 51

JPMorgan Chase & Co. /2005 Annual Report 49
Treasury & Securities Services
Treasury & Securities Services is a global leader in providing trans-
action, investment and information services to support the needs
of corporations, issuers and institutional investors worldwide.
TSS is one of the largest cash management providers in the
world and a leading global custodian. The TS business provides a
variety of cash management products, trade finance and logistics
solutions, wholesale card products, and short-term liquidity man-
agement tools. The IS business provides custody, fund services,
securities lending, and performance measurement and execution
products. The ITS business provides trustee, depository and admin-
istrative services for debt and equity issuers. TS partners with
the Commercial Banking, Consumer & Small Business Banking
and Asset & Wealth Management businesses to serve clients
firmwide. As a result, certain TS revenues are included in other
segments’ results. TSS combined the management of the IS and ITS
businesses under the name WSS to create an integrated fran-
chise which provides custody and investor services as well as
securities clearance and trust services to clients globally.
Beginning January 1, 2006, TSS will report results for two
divisions: TS and WSS.
Selected income statement data
Year ending December 31,(a)
(in millions, except ratios) 2005 2004 2003
Revenue
Lending & deposit related fees $ 728 $ 647 $ 470
Asset management, administration
and commissions 2,908 2,445 1,903
Other income 543 382 288
Noninterest revenue 4,179 3,474 2,661
Net interest income 2,062 1,383 947
Total net revenue 6,241 4,857 3,608
Provision for credit losses —71
Credit reimbursement (to) from IB(b) (154) (90) 36
Noninterest expense
Compensation expense 2,061 1,629 1,257
Noncompensation expense 2,293 2,391 1,745
Amortization of intangibles 116 93 26
Total noninterest expense 4,470 4,113 3,028
Operating earnings before income
tax expense 1,617 647 615
Income tax expense 580 207 193
Operating earnings $ 1,037 $ 440 $ 422
Financial ratios
ROE 55% 17% 15%
Overhead ratio 72 85 84
Pre-tax margin ratio(c) 26 13 17
(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) 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.
(c) Pre-tax margin represents Operating earnings before income tax expense divided by Total
net revenue, which is a comprehensive measure of pre-tax performance and is another
basis by which TSS management evaluates its performance and that of its competitors.
Pre-tax margin is an effective measure of TSS’ earnings, after all operating costs are taken
into consideration.
2005 compared with 2004
Operating earnings were $1.0 billion, an increase of $597 million, or 136%.
Primarily driving the improvement in revenue were the Merger, business growth,
and widening spreads on and growth in average liability balances. Noninterest
expense increased primarily due to the Merger and higher compensation
expense. Results for 2005 also included charges of $58 million (after-tax)
to terminate a client contract. Results for 2004 also included software-
impairment charges of $97 million (after-tax) and a gain of $10 million
(after-tax) on the sale of a business.
TSS net revenue of $6.2 billion increased $1.4 billion, or 28%. Net interest
income grew to $2.1 billion, up $679 million, due to wider spreads on liability
balances, a change in the corporate deposit pricing methodology in 2004 and
growth in average liability balances. Noninterest revenue of $4.2 billion
increased by $705 million, or 20%, due to product growth across TSS, the
Merger and the acquisition of Vastera. Leading the product revenue growth
was an increase in assets under custody to $11.2 trillion, primarily driven by
market value appreciation and new business, along with growth in wholesale
card, securities lending, foreign exchange, trust product, trade, clearing and
ACH revenues. Partially offsetting this growth in noninterest revenue was a
decline in deposit-related fees due to higher interest rates and the absence,
in the current period, of a gain on the sale of a business.
TS net revenue of $2.6 billion grew by $628 million, Investor Services net
revenue of $2.2 billion grew by $446 million, and Institutional Trust Services
net revenue of $1.5 billion grew by $310 million. TSS firmwide net revenue,
which includes TS net revenue recorded in other lines of business, grew to
$8.8 billion, up $2.3 billion, or 35%. Treasury Services firmwide net revenue
grew to $5.2 billion, up $1.6 billion, or 43%.
Credit reimbursement to the Investment Bank was $154 million, an increase
of $64 million, primarily as a result of the Merger. TSS is charged a credit
reimbursement related to certain exposures managed within the Investment
Bank credit portfolio on behalf of clients shared with TSS.
Noninterest expense of $4.5 billion was up $357 million, or 9%, due to the
Merger, increased compensation expense resulting from new business growth
and the Vastera acquisition, and charges of $93 million to terminate a client
contract. Partially offsetting these increases were higher product unit costs charged
to other lines of business, primarily Commercial Banking, lower allocations
of Corporate segment expenses, merger savings and business efficiencies.
The prior year included software-impairment charges of $155 million.
2004 compared with 2003
Operating earnings for the year were $440 million, an increase of $18 million,
or 4%. Results in 2004 include an after-tax gain of $10 million on the sale
of an IS business. Prior-year results include an after-tax gain of $22 million
on the sale of an ITS business. Excluding these one-time gains, operating
earnings would have increased by $30 million, or 8%. Both net revenue
and Noninterest expense increased primarily as a result of the Merger, the
acquisition of Bank One’s Corporate Trust business in November 2003 and
the acquisition of Electronic Financial Services (“EFS”) in January 2004.