JP Morgan Chase 2006 Annual Report Download - page 29

JPMorgan Chase & Co. / 2006 Annual Report 27
Credit costs for the Firm were $5.5 billion compared with $7.3 billion in the
prior year. The $1.8 billion decrease was due primarily to lower bankruptcy-
related losses in Card Services and the release in the current year of a portion
of the $400 million special provision related to Hurricane Katrina that was
taken in 2005. The decline was offset partially by an increase in the wholesale
provision. The wholesale provision was $321 million compared with a benefit
of $811 million in the prior year. The increase was due primarily to portfolio
activity, partly offset by a decrease in nonperforming loans. Credit quality in
the wholesale portfolio was stable. The benefit in 2005 was due to improve-
ment in credit quality, reflected by significant reductions in criticized exposures
and nonperforming loans. Consumer provision for credit losses was $5.2 bil-
lion compared with $8.1 billion in the prior year. The reduction primarily
reflected the impact of significantly lower bankruptcy-related credit losses and
a special provision for credit losses in 2005 related to Hurricane Katrina.
The Firm had, at year end, total stockholders’ equity of $115.8 billion, and a
Tier 1 capital ratio of 8.7%. The Firm purchased $3.9 billion, or 91 million
shares of common stock during the year.
2007 Business outlook
The following forward-looking statements are based upon the current beliefs
and expectations of JPMorgan Chase’s management and are subject to sig-
nificant risks and uncertainties. These risks and uncertainties could cause
JPMorgan Chase’s results to differ materially from those set forth in such for-
ward-looking statements.
JPMorgan Chase’s outlook for 2007 should be viewed against the backdrop of
the global economy, financial markets activity and the geopolitical environment,
all of which are linked integrally. While the Firm considers outcomes for, and has
contingency plans to respond to, stress environments, the basic outlook for
2007 is predicated on the interest rate movements implied in the forward rate
curve for U.S. Treasury securities, the continuation of favorable U.S. and interna-
tional equity markets and continued expansion of the global economy.
The Investment Bank enters 2007 with a strong investment banking fee
pipeline and remains focused on developing new products and capabilities.
Asset Management anticipates growth driven by continued net asset inflows.
Commercial Banking and Treasury & Securities Services expect growth due to
increased business activity and product sales with some competitive and rate
pressures. However, the performance of the Firm’s wholesale businesses will
be affected by overall global economic growth and by financial market move-
ments and activity levels in any given period.
Retail Financial Services anticipates benefiting from the continued expansion
of the branch network and sales force, including the addition of The Bank of
New York’s 339 branches, and improved sales productivity and cross-selling in
the branches. Loan and deposit spreads are expected to experience continued
compression due to the interest rate and competitive environments.
Card Services anticipates growth in managed receivables and sales volume,
both of which are expected to benefit from marketing initiatives and new
partnerships. Expenditures on marketing are expected to be lower than the
2006 level.
In the Corporate segment, the revenue outlook for the Private Equity business
is directly related to the strength of the equity markets and the performance
of the underlying portfolio investments. If current market conditions persist,
the Firm anticipates continued realization of private equity gains in 2007, but
results can be volatile from quarter to quarter. Management believes that the
net loss in Treasury and Other Corporate, on a combined basis, will be approxi-
mately $50 to $100 million per quarter in 2007, reflecting merger savings and
other expense efficiency initiatives, such as less excess real estate.
The Provision for credit losses in 2007 is anticipated to be higher than in
2006, primarily driven by a trend toward a more normal level of provisioning
for credit losses in both the wholesale and consumer businesses. The con-
sumer Provision for credit losses should reflect a higher level of net charge-
offs as bankruptcy filings continue to increase from the significantly lower
than normal levels experienced in 2006 related to the change in bankruptcy
law in 2005.
Firmwide expenses are anticipated to reflect investments in each business,
continued merger savings and other operating efficiencies. Annual Merger
savings are expected to reach approximately $3.0 billion by the end of 2007,
upon the completion of the last significant conversion activity, the wholesale
deposit conversion scheduled for the second half of 2007. Offsetting merger
savings will be continued investment in distribution enhancements and new
product offerings, and expenses related to recent acquisitions including The
Bank of New York transaction. Merger costs of approximately $400 million
are expected to be incurred during 2007 (including a modest amount related
to The Bank of New York transaction). These additions are expected to bring
total cumulative merger costs to $3.8 billion by the end of 2007.