JP Morgan Chase 2006 Annual Report Download - page 52

ASSET MANAGEMENT
With assets under supervision of $1.3 trillion, AM is a global
leader in investment and wealth management. AM clients include
institutions, retail investors and high-net-worth individuals in
every major market throughout the world. AM offers global
investment management in equities, fixed income, real estate,
hedge funds, private equity and liquidity, including both money-
market instruments and bank deposits. AM also provides trust
and estate and banking services to high-net-worth clients, and
retirement services for corporations and individuals. The majority
of AM’s client assets are in actively managed portfolios.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(b)
Revenue
Asset management, administration
and commissions $ 5,295 $ 4,189 $ 3,140
All other income 521 394 243
Noninterest revenue 5,816 4,583 3,383
Net interest income 971 1,081 796
Total net revenue 6,787 5,664 4,179
Provision for credit losses (28) (56) (14)
Noninterest expense
Compensation expense 2,777 2,179 1,579
Noncompensation expense 1,713 1,582 1,502
Amortization of intangibles 88 99 52
Total noninterest expense 4,578 3,860 3,133
Income before income tax expense 2,237 1,860 1,060
Income tax expense 828 644 379
Net income $ 1,409 $ 1,216 $ 681
Financial ratios
ROE 40% 51% 17%
Overhead ratio 67 68 75
Pretax margin ratio(a) 33 33 25
(a) 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 evaluates
its performance and that of its competitors.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Net income was a record $1.4 billion, up by $193 million, or 16%, from the
prior year. Improved results were driven by increased revenue offset partially
by higher performance-based compensation expense, incremental expense
from the adoption of SFAS 123R and the absence of a tax credit recognized in
the prior year.
Total net revenue was a record $6.8 billion, up by $1.1 billion, or 20%, from
the prior year. Noninterest revenue, principally fees and commissions, of $5.8
billion was up by $1.2 billion, or 27%. This increase was due largely to
increased assets under management and higher performance and placement
fees. Net interest income was $971 million, down by $110 million, or 10%,
from the prior year. The decline was due primarily to narrower spreads on
deposit products and the absence of BrownCo, partially offset by higher
deposit and loan balances.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
50 JPMorgan Chase & Co. / 2006 Annual Report
Institutional revenue grew 41%, to $2.0 billion, due to net asset inflows and
higher performance fees. Private Bank revenue grew 13%, to $1.9 billion, due
to increased placement activity, higher asset management fees and higher
deposit balances, partially offset by narrower average spreads on deposits.
Retail revenue grew 22%, to $1.9 billion, primarily due to net asset inflows,
partially offset by the sale of BrownCo. Private Client Services revenue
decreased 1%, to $1.0 billion, as higher deposit and loan balances were more
than offset by narrower average deposit and loan spreads.
Provision for credit losses was a benefit of $28 million compared with a bene-
fit of $56 million in the prior year. The current-year benefit reflects a high level
of recoveries and stable credit quality.
Total noninterest expense of $4.6 billion was up by $718 million, or 19%,
from the prior year. The increase was due to higher performance-based com-
pensation, incremental expense related to SFAS 123R, increased salaries and
benefits related to business growth, and higher minority interest expense
related to Highbridge, partially offset by the absence of BrownCo.
2005 compared with 2004
Net income of $1.2 billion was up $535 million from the prior year due to
the Merger and increased revenue, partially offset by higher compensation
expense.
Total net revenue was $5.7 billion, up $1.5 billion, or 36%. Noninterest rev-
enue, primarily fees and commissions, of $4.6 billion was up $1.2 billion,
principally due to the Merger, the acquisition of a majority interest in
Highbridge in 2004, net asset inflows and global equity market appreciation.
Net interest income of $1.1 billion was up $285 million, primarily due to the
Merger, higher deposit and loan balances, partially offset by narrower deposit
spreads.
Private Bank revenue grew 9%, to $1.7 billion. Retail revenue grew 30%, to
$1.5 billion. Institutional revenue grew 57%, to $1.4 billion, due to the acquisi-
tion of a majority interest in Highbridge. Private Client Services revenue grew
88%, to $1.0 billion.
Provision for credit losses was a benefit of $56 million, compared with a
benefit of $14 million in the prior year, due to lower net charge-offs and
refinements in the data used to estimate the allowance for credit losses.
Total noninterest expense of $3.9 billion increased by $727 million, or 23%,
reflecting the Merger, the acquisition of Highbridge and increased compensa-
tion expense related primarily to higher performance-based incentives.