JP Morgan Chase 2006 Annual Report Download - page 50

TREASURY & SECURITIES SERVICES
Treasury & Securities Services is a global leader in providing
transaction, investment and information services to support the
needs of institutional clients worldwide. TSS is one of the largest
cash management providers in the world and a leading global
custodian. Treasury Services provides a variety of cash manage-
ment products, trade finance and logistics solutions, wholesale
card products, and short-term liquidity management capabilities
to small and mid-sized companies, multinational corporations,
financial institutions and government entities. TS partners with
the Commercial Banking, Retail Financial Services and Asset
Management businesses to serve clients firmwide. As a result,
certain TS revenues are included in other segments’ results.
Worldwide Securities Services stores, values, clears and services
securities and alternative investments for investors and broker-
dealers; and manages Depositary Receipt programs globally.
As a result of the transaction with The Bank of New York on October 1, 2006,
selected corporate trust businesses were transferred from TSS to the Corporate
segment and are reported in discontinued operations for all periods presented.
Selected income statement data
Year ending December 31,
(in millions, except ratios) 2006 2005 2004(c)
Revenue
Lending & deposit related fees $ 735 $ 731 $ 649
Asset management, administration
and commissions 2,692 2,409 1,963
All other income 612 519 361
Noninterest revenue 4,039 3,659 2,973
Net interest income 2,070 1,880 1,225
Total net revenue 6,109 5,539 4,198
Provision for credit losses (1) —7
Credit reimbursement to IB(a) (121) (154) (90)
Noninterest expense
Compensation expense 2,198 1,874 1,414
Noncompensation expense 1,995 2,095 2,254
Amortization of intangibles 73 81 58
Total noninterest expense 4,266 4,050 3,726
Income before income tax expense 1,723 1,335 375
Income tax expense 633 472 98
Net income $ 1,090 $ 863 $ 277
Financial ratios
ROE 48% 57% 14%
Overhead ratio 70 73 89
Pretax margin ratio(b) 28 24 9
(a) 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.
(b) Pretax margin represents Income before income tax expense divided by Total net revenue,
which is a measure of pretax performance and another basis by which management evalu-
ates its performance and that of its competitors.
(c) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
48 JPMorgan Chase & Co. / 2006 Annual Report
2006 compared with 2005
Net income was $1.1 billion, an increase of $227 million, or 26%, from the
prior year. Earnings benefited from increased revenue, and was offset by high-
er compensation expense and the absence of prior-year charges of $58 mil-
lion (after-tax) related to the termination of a client contract.
Total net revenue was $6.1 billion, an increase of $570 million, or 10%.
Noninterest revenue was $4.0 billion, up by $380 million, or 10%. The
improvement was due primarily to an increase in assets under custody to
$13.9 trillion, which was driven by market value appreciation and new busi-
ness. Also contributing to the improvement was growth in depositary receipts,
securities lending, and global clearing, all of which were driven by a combina-
tion of increased product usage by existing clients and new business. Net
interest income was $2.1 billion, an increase of $190 million, or 10%, bene-
fiting from a 22% increase in average liability balances, partially offset by the
impact of growth in narrower-spread liability products.
Treasury Services Total net revenue of $2.8 billion was up 4%. Worldwide
Securities Services Total net revenue of $3.3 billion grew by $473 million, or
17%. TSS firmwide Total net revenue, which includes Treasury Services Total
net revenue recorded in other lines of business, grew to $8.6 billion, up by
$778 million, or 10%. Treasury Services firmwide Total net revenue grew to
$5.2 billion, an increase of $305 million, or 6%.
Total noninterest expense was $4.3 billion, up $216 million, or 5%. The
increase was due to higher compensation expense related to increased client
activity, business growth, investment in new product platforms and incremen-
tal expense related to SFAS 123R, partially offset by the absence of prior-year
charges of $93 million related to the termination of a client contract.
2005 compared with 2004
Net income was $863 million, an increase of $586 million, or 212%. 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.
Total net revenue of $5.5 billion increased $1.3 billion, or 32%. Net interest
income grew to $1.9 billion, up $655 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 $3.7 billion
increased by $686 million, or 23%, 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 $10.7 trillion, primarily driven by
market value appreciation and new business, along with growth in wholesale
card, securities lending, foreign exchange, 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.