JP Morgan Chase 2005 Annual Report Download - page 69

JPMorgan Chase & Co. /2005 Annual Report 67
• Banks and finance companies: This industry group, primarily consisting
of exposure to commercial banks, is the largest segment of the Firm’s
wholesale credit portfolio. Credit quality is high, as 88% of the exposure
in this category is rated investment-grade.
• Real estate: This industry, the second largest segment of the Firm’s whole-
sale credit portfolio, grew modestly in 2005, as the portfolio continued to
benefit from relatively low interest rates, high liquidity and increased capital
demand. The exposure is well-diversified by client, transaction type, geography
and property type.
• Oil and gas: During 2005, exposure to this industry group increased as a
result of the rise in oil and gas prices; derivative receivables MTM increased
on contracts that were executed at lower price levels. In addition, the Firm
extended shorter term loans that were expected to be refinanced through
capital market transactions and further syndications.
• Media: Criticized exposures within Media increased in 2005, and this
industry now represents the largest percentage of the total criticized
portfolio. The increase was attributable primarily to the extension of
short-term financings to select borrowers. The remaining Media portfolio
is stable, with the majority of the exposure rated investment-grade.
• Automotive: In 2005, Automotive original equipment manufacturers
(“OEMs”) and suppliers based in North America were negatively affected
by a challenging operating environment. As a result, criticized exposures to
the Automotive industry grew, primarily as a result of downgrades to select
names within the portfolio. However, though larger in the aggregate, most
of the criticized exposure remains undrawn and performing.
• All other: All other in the wholesale credit exposure concentration table at
December 31, 2005, excluding HFS, included $283 billion of credit exposure
to 21 industry segments. Exposures related to SPEs and high-net-worth
individuals totaled 45% of this category. SPEs provide secured financing
(generally backed by receivables, loans or bonds on a bankruptcy-remote,
non-recourse or limited-recourse basis) originated by companies in a
diverse group of industries that are not highly correlated. The remaining
All other exposure is well diversified across other industries; none comprise
more than 3% of total exposure.
Derivative contracts
In the normal course of business, the Firm utilizes derivative instruments to
meet the needs of customers, to generate revenues through trading activities,
to manage exposure to fluctuations in interest rates, currencies and other
markets and to manage its own credit risk. The Firm uses the same credit risk
management procedures as those used for its traditional lending activities to
assess and approve potential credit exposures when entering into derivative
transactions.
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a
rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s.
The criticized component of the portfolio decreased to $5.2 billion (excluding
HFS) at December 31, 2005, from $8.3 billion at year-end 2004, reflecting
strong credit quality, refinancings and gross charge-offs. Also contributing to
the decline was a refinement in methodology in the first quarter of 2005 to
align the ratings methodologies of the heritage firms.
At December 31, 2005, Automotive, Telecom services and Retail and consumer
services moved into the top 10 of wholesale criticized exposure, replacing
Chemicals/plastics, Business services and Metals/mining industries.
Wholesale nonperforming assets
Wholesale nonperforming assets (excluding purchased held-for-sale wholesale
loans) decreased by $779 million from $1.8 billion at December 31, 2004, as
a result of loan sales, repayments and gross charge-offs. For full year 2005,
wholesale net recoveries were $77 million compared with net charge-offs of
$186 million in 2004, primarily due to lower gross charge-offs. The net recovery
rate for full year 2005 was 0.06% compared with a net charge-off rate of
0.18% for the prior year. Net charge-offs do not include $67 million of gains
from sales of nonperforming loans that were sold during 2005 to a counter-
party other than the original borrower. When it is determined that a loan will
be sold it is transferred into a held-for-sale account. Held-for-sale loans are
accounted for at lower of cost or fair value, with changes in value recorded in
other revenue.
Wholesale criticized exposure – industry concentrations
2005 2004
As of December 31, Credit % of Credit % of
(in millions) exposure portfolio exposure portfolio
Media $ 684 13.2% $ 509 6.1%
Automotive 643 12.4 359 4.4
Consumer products 590 11.4 479 5.8
Telecom services 430 8.3 275 3.3
Airlines 333 6.5 450 5.4
Utilities 295 5.7 890 10.7
Machinery and equipment
manufacturing 290 5.6 459 5.6
Retail and consumer services 288 5.6 393 4.8
Real estate 276 5.4 765 9.2
Building materials/construction 266 5.1 430 5.2
All other 1,077 20.8 3,273 39.5
Total excluding HFS $ 5,172 100.0% $ 8,282 100.0%
Held-for-sale(a) 1,069 2
Total $ 6,241 $ 8,284
(a) HFS loans primarily relate to securitization and syndication activities; excludes purchased
nonperforming HFS loans.
Wholesale selected industry discussion
Presented below is a discussion of several industries to which the Firm has
significant exposure and which it continues to monitor because of actual or
potential credit concerns. For additional information, refer to the tables above
and on the preceding page.