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Management’s discussion and analysis
JPMorgan Chase & Co.
66 JPMorgan Chase & Co. /2005 Annual Report
At December 31, 2005, the percentage of the investment-grade wholesale
exposure, excluding HFS, remained relatively unchanged from December 31,
2004. Derivative receivables of less than one year decreased as a result of the
appreciation of the U.S. dollar on short-dated foreign exchange (“FX”) contracts.
The percentage of derivative exposure greater than 5 years increased from
42% to 56% at year-end 2005, primarily as a result of the reduction in
shorter-dated exposure.
Collateral
Noninvestment-grade held against
As of December 31, 2005 Credit Investment Net charge-offs/ Credit derivative
(in millions, except ratios) exposure(d) grade Noncriticized Criticized (recoveries) derivative hedges(e) receivables(d)
Top 10 industries(a)
Banks and finance companies $ 53,579 88% $ 6,462 $ 232 $ (16) $ (9,490) $ (1,482)
Real estate 29,974 55 13,226 276 — (560) (2)
Consumer products 25,678 71 6,791 590 2 (927) (28)
Healthcare 25,435 79 4,977 243 12 (581) (7)
State and municipal governments(b) 25,328 98 409 40 — (597) (1)
Utilities 20,482 90 1,841 295 (4) (1,624) —
Retail and consumer services(b) 19,920 75 4,654 288 12 (989) (5)
Oil and gas 18,200 77 4,267 9 — (1,007) —
Asset managers 17,358 82 2,949 103 (1) (25) (954)
Securities firms and exchanges 17,094 89 1,833 15 — (2,009) (1,525)
All other 282,802 82 47,966 3,081 (82) (12,073) (1,996)
Total excluding HFS $ 535,850 81% $ 95,375 $ 5,172 $ (77) $ (29,882) $ (6,000)
Held-for-sale(c) 17,552
Total exposure $ 553,402
Collateral
Noninvestment-grade held against
As of December 31, 2004 Credit Investment Net charge-offs/ Credit derivative
(in millions, except ratios) exposure(d) grade Noncriticized Criticized (recoveries) derivative hedges(e) receivables(d)
Top 10 industries(a)
Banks and finance companies $ 55,840 90% $ 5,348 $ 187 $ 6 $ (11,695) $ (3,464)
Real estate 25,761 62 9,036 765 9 (800) (45)
Consumer products 21,251 68 6,267 479 85 (1,189) (50)
Healthcare 21,890 79 4,321 249 1 (741) (13)
State and municipal governments 19,728 97 592 14 — (394) (18)
Utilities 21,132 85 2,316 890 63 (2,247) (27)
Retail and consumer services 21,573 76 4,815 393 — (1,767) (42)
Oil and gas 14,420 81 2,713 51 9 (1,282) (26)
Asset managers 20,199 79 4,192 115 (15) (80) (655)
Securities firms and exchanges 18,034 88 2,218 17 1 (1,398) (2,068)
All other 295,902 82 48,150 5,122 27 (15,607) (2,893)
Total excluding HFS $ 535,730 82% $ 89,968 $ 8,282 $ 186 $ (37,200) $ (9,301)
Held-for-sale(c) 6,440
Total exposure $ 542,170
(a) Based upon December 31, 2005, determination of Top 10 industries.
(b) During the second quarter of 2005, the Firm revised its industry classification for educational institutions to better reflect risk correlations and enhance the Firm’s management of industry risk, resulting
in an increase to State and municipal governments and a decrease to Retail and consumer services.
(c) HFS loans primarily relate to securitization and syndication activities.
(d) Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. At December 31, 2005 and 2004, collateral
held against derivative receivables excludes $27 billion and $32 billion, respectively, of cash collateral as a result of the Firm electing to report the fair value of derivative assets and liabilities net of
cash received and paid, respectively, under legally enforceable master netting agreements.
(e) Represents notional amounts only; these credit derivatives do not qualify for hedge accounting under SFAS 133.
Wholesale credit exposure – selected industry concentration
The Firm continues to focus on the management and diversification of industry
concentrations, with particular attention paid to industries with actual or poten-
tial credit concerns. As of December 31, 2005, the top 10 industries remained
predominantly unchanged from year-end 2004, with the exception of Oil and
gas, which replaced Media. Below are summaries of the top 10 industry con-
centrations as of December 31, 2005 and 2004.