JP Morgan Chase 2008 Annual Report Download - page 72

Management’s discussion and analysis
70 JPMorgan Chase & Co./ 2008 Annual Report
ASSET MANAGEMENT
On May 30, 2008, JPMorgan Chase merged with The Bear Stearns
Companies, Inc. The merger resulted in the addition of a new client
segment, Bear Stearns Brokerage, but did not materially affect bal-
ances or business metrics.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2008 2007 2006
Revenue
Asset management, administration
and commissions $6,004 $6,821 $5,295
All other income 62 654 521
Noninterest revenue 6,066 7,475 5,816
Net interest income 1,518 1,160 971
Total net revenue 7,584 8,635 6,787
Provision for credit losses 85 (18) (28)
Noninterest expense
Compensation expense 3,216 3,521 2,777
Noncompensation expense 2,000 1,915 1,713
Amortization of intangibles 82 79 88
Total noninterest expense 5,298 5,515 4,578
Income before income tax
expense 2,201 3,138 2,237
Income tax expense 844 1,172 828
Net income $1,357 $1,966 $1,409
Revenue by client segment
Private Bank(a) $ 2,565 $2,362 $1,686
Institutional 1,775 2,525 1,972
Retail 1,620 2,408 1,885
Private Wealth Management(a) 1,387 1,340 1,244
Bear Stearns Brokerage 237 ——
Total net revenue $ 7,584 $ 8,635 $ 6,787
Financial ratios
ROE 24% 51% 40%
Overhead ratio 70 64 67
Pretax margin ratio(b) 29 36 33
(a) In 2008, certain clients were transferred from Private Bank to Private Wealth
Management. Prior periods have been revised to conform to this change.
(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 evaluates its performance and that of its competitors.
2008 compared with 2007
Net income was $1.4 billion, a decline of $609 million, or 31%, from
the prior year, driven by lower total net revenue offset partially by
lower noninterest expense.
Total net revenue was $7.6 billion, a decrease of $1.1 billion, or
12%, from the prior year. Noninterest revenue was $6.1 billion, a
decline of $1.4 billion, or 19%, due to lower performance fees and
the effect of lower markets, including the impact of lower market val-
uations of seed capital investments. The lower results were offset
partially by the benefit of the Bear Stearns merger and increased rev-
enue from net asset inflows. Net interest income was $1.5 billion, up
$358 million, or 31%, from the prior year, due to higher deposit and
loan balances and wider deposit spreads.
Private Bank revenue grew 9% to $2.6 billion, due to increased
deposit and loan balances and net asset inflows, partially offset by
the effect of lower markets and lower performance fees. Institutional
revenue declined 30% to $1.8 billion due to lower performance fees,
partially offset by net liquidity inflows. Retail revenue declined 33%
to $1.6 billion due to the effect of lower markets, including the
impact of lower market valuations of seed capital investments and
net equity outflows. Private Wealth Management revenue grew 4%
to $1.4 billion due to higher deposit and loan balances. Bear Stearns
Brokerage contributed $237 million to revenue.
The provision for credit losses was $85 million, compared with a ben-
efit of $18 million in the prior year, reflecting an increase in loan bal-
ances, higher net charge-offs and a weakening credit environment.
Noninterest expense was $5.3 billion, down $217 million, or 4%, com-
pared with the prior year due to lower performance-based compensa-
tion, largely offset by the effect of the Bear Stearns merger and higher
compensation expense resulting from increased average headcount.
2007 compared with 2006
Net income was a record $2.0 billion, an increase of $557 million, or
40%, from the prior year. Results benefited from record total net rev-
enue, partially offset by higher noninterest expense.
Total net revenue was $8.6 billion, an increase of $1.8 billion, or
27%, from the prior year. Noninterest revenue, primarily fees and
commissions, was $7.5 billion, up $1.7 billion, or 29%, largely due
to increased assets under management and higher performance and
placement fees. Net interest income was $1.2 billion, up $189 mil-
lion, or 19%, from the prior year, largely due to higher deposit and
loan balances.
Institutional revenue grew 28% to $2.5 billion, due to net asset
inflows and performance fees. Private Bank revenue grew 40% to
$2.4 billion, due to higher assets under management, performance
and placement fees, and increased loan and deposit balances. Retail
revenue grew 28%, to $2.4 billion, primarily due to market apprecia-
tion and net asset inflows. Private Wealth Management revenue
grew 8% to $1.3 billion, reflecting higher assets under management
and higher deposit balances.
70 JPMorgan Chase & Co./ 2008 Annual Report
AM, with assets under supervision of $1.5 trillion, 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 money market instru-
ments and bank deposits. AM also provides trust and
estate, banking and brokerage 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.