JP Morgan Chase 2006 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
44 JPMorgan Chase & Co. / 2006 Annual Report
by $197 million, or 6%. Interchange income increased, benefiting from 12%
higher charge volume, but was more than offset by higher volume-driven pay-
ments to partners, including Kohl’s, and increased rewards expense (both of
which are netted against interchange income).
The managed provision for credit losses was $4.6 billion, down by $2.7 billion,
or 37%, from the prior year. This benefit was due to a significant decrease in
net charge-offs of $2.4 billion, reflecting the continued low level of bankruptcy
losses, partially offset by an increase in contractual net charge-offs. The provi-
sion also benefited from a release in the Allowance for loan losses in the cur-
rent year of unused reserves related to Hurricane Katrina, compared with an
increase in the Allowance for loan losses in the prior year. The managed net
charge-off rate decreased to 3.33%, down from 5.21% in the prior year. The
30-day managed delinquency rate was 3.13%, up from 2.79% in the prior year.
Noninterest expense of $5.1 billion was up $476 million, or 10%, from the
prior year due largely to higher marketing spending and acquisitions offset
partially by merger savings.
2005 compared with 2004
Net income of $1.9 billion was up $633 million, or 50%, from the prior year due
to the Merger. In addition, lower expenses driven by merger savings, stronger
underlying credit quality and higher revenue from increased loan balances and
charge volume were offset partially by the impact of increased bankruptcies.
Net managed revenue was $14.9 billion, up $4.5 billion, or 43%. Net interest
income was $11.8 billion, up $3.4 billion, or 41%, primarily due to the Merger,
and the acquisition of a private label portfolio. In addition, higher loan bal-
ances were offset partially by narrower loan spreads and the reversal of rev-
enue related to increased bankruptcy losses. Noninterest revenue of $3.1 bil-
lion was up $1.0 billion, or 50%, due to the Merger and higher interchange
income from higher charge volume, partially offset by higher volume-driven
payments to partners and higher expense related to rewards programs.
The Provision for credit losses was $7.3 billion, up $2.5 billion, or 51%,
primarily due to the Merger, and included the acquisition of a private label
portfolio. The provision also increased due to record bankruptcy-related net
charge-offs resulting from bankruptcy legislation which became effective on
October 17, 2005. Finally, the Allowance for loan losses was increased in part
by the special Provision for credit losses related to Hurricane Katrina. These fac-
tors were offset partially by lower contractual net charge-offs. Despite a record
level of bankruptcy losses, the net charge-off rate improved. The managed net
charge-off rate was 5.21%, down from 5.27% in the prior year. The 30-day
managed delinquency rate was 2.79%, down from 3.70% in the prior year,
driven primarily by accelerated loss recognition of delinquent accounts as a
result of the bankruptcy reform legislation and strong underlying credit quality.
Noninterest expense of $4.6 billion increased by $1.0 billion, or 27%, primarily
due to the Merger, which included the acquisition of a private label portfolio.
Merger savings, including lower processing and compensation costs were off-
set partially by higher spending on marketing.
Selected metrics
Year ended December 31,
(in millions, except headcount, ratios
and where otherwise noted) 2006 2005 2004(d)
% of average managed outstandings:
Net interest income 8.36% 8.65% 9.16%
Provision for credit losses 3.26 5.39 5.31
Noninterest revenue 2.09 2.61 2.59
Risk adjusted margin(a) 7.19 5.88 6.45
Noninterest expense 3.60 3.67 4.25
Pretax income (ROO) 3.59 2.21 2.20
Net income 2.27 1.40 1.39
Business metrics
Charge volume (in billions) $ 339.6 $ 301.9 $ 193.6
Net accounts opened (in thousands)(b) 45,869 21,056 7,523
Credit cards issued (in thousands) 154,424 110,439 94,285
Number of registered
Internet customers 22.5 14.6 13.6
Merchant acquiring business(c)
Bank card volume (in billions) $ 660.6 $ 563.1 $ 396.2
Total transactions 18,171 15,499 9,049
Selected ending balances
Loans:
Loans on balance sheets $ 85,881 $ 71,738 $ 64,575
Securitized loans 66,950 70,527 70,795
Managed loans $152,831 $ 142,265 $ 135,370
Selected average balances
Managed assets $148,153 $ 141,933 $ 94,741
Loans:
Loans on balance sheets $ 73,740 $ 67,334 $ 38,842
Securitized loans 67,367 69,055 52,590
Managed loans $141,107 $ 136,389 $ 91,432
Equity $ 14,100 $ 11,800 $ 7,608
Headcount 18,639 18,629 19,598
Managed credit quality statistics
Net charge-offs $ 4,698 $ 7,100 $ 4,821
Net charge-off rate 3.33% 5.21% 5.27%
Managed delinquency ratios
30+ days 3.13% 2.79% 3.70%
90+ days 1.50 1.27 1.72
Allowance for loan losses $ 3,176 $ 3,274 $ 2,994
Allowance for loan losses to
period-end loans 3.70% 4.56% 4.64%
(a) Represents Total net revenue less Provision for credit losses.
(b) 2006 includes approximately 21 million accounts from the acquisition of the Kohl’s private
label portfolio in the second quarter of 2006 and approximately 9 million accounts from the
acquisition of the BP and Pier 1 Imports, Inc. p rivate label portfolios in the fourth quarter of
2006. Fourth quarter of 2005 includes approximately 10 million accounts from the acquisi-
tion of the Sears Canada portfolio.
(c) Represents 100% of the merchant acquiring business.
(d) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
The following is a brief description of selected business metrics within Card Services.
• Charge volume – Represents the dollar amount of cardmember purchases, balance transfers and cash advance activity.
• Net accounts opened – Includes originations, purchases and sales.
• Merchant acquiring business – Represents an entity that processes payments for merchants. JPMorgan Chase is a partner in Chase Paymentech Solutions, LLC.
- Bank card volume – Represents the dollar amount of transactions processed for merchants.
- Total transactions – Represents the number of transactions and authorizations processed for merchants.