JP Morgan Chase 2009 Annual Report Download - page 104

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report
102
of means including loan syndication and participations, loan sales,
securitizations, credit derivatives, use of master netting agreements
and collateral and other risk-reduction techniques, which are fur-
ther discussed in the following risk sections. For consumer credit
risk, the key focus items are trends and concentrations at the
portfolio level, where potential problems can be remedied through
changes in underwriting policies and portfolio guidelines. Con-
sumer Credit Risk Management monitors trends against business
expectations and industry benchmarks.
Risk reporting
To enable monitoring of credit risk and decision-making, aggregate
credit exposure, credit quality forecasts, concentrations levels and
risk profile changes are reported regularly to senior credit risk
management. Detailed portfolio reporting of industry, customer,
product and geographic concentrations occurs monthly, and the
appropriateness of the allowance for credit losses is reviewed by
senior management at least on a quarterly basis. Through the risk
reporting and governance structure, credit risk trends and limit
exceptions are provided regularly to, and discussed with, senior
management, as mentioned on page 94 of this Annual Report.
2009 Credit risk overview
During 2009, the credit environment experienced further deteriora-
tion compared with 2008, resulting in increased defaults, down-
grades and reduced liquidity. In the first part of the year, the pace of
deterioration increased, adversely affecting many financial institutions
and impacting the functioning of credit markets, which remained
weak. The pace of deterioration also gave rise to a high level of
uncertainty regarding the ultimate extent of the downturn. The Firm’s
credit portfolio was affected by these market conditions and experi-
enced continued deteriorating credit quality, especially in the first part
of the year, generally consistent with the market.
For the wholesale portfolio, criticized assets, nonperforming assets
and charge-offs increased significantly from 2008, reflecting contin-
ued weakness in the portfolio, particularly in commercial real es-
tate. In the latter part of the year, there were some positive
indicators, for example, loan origination activity and market liquidity
improved and credit spreads tightened. The wholesale businesses
have remained focused on actively managing the portfolio, includ-
ing ongoing, in-depth reviews of credit quality and industry, prod-
uct and client concentrations. Underwriting standards across all
areas of lending have remained under review and strengthened
where appropriate, consistent with evolving market conditions and
the Firm’s risk management activities. In light of the current market
conditions, the wholesale allowance for loan loss coverage ratio
has been strengthened to 3.57% from 2.64% at the end of 2008.
The consumer portfolio credit performance continued to be nega-
tively affected by the economic environment of 2009. Higher unem-
ployment and weaker overall economic conditions have led to a
significant increase in the number of loans charged off, while contin-
ued weak housing prices have driven a significant increase in the
severity of loss recognized on real estate loans that defaulted. During
2009, the Firm took proactive action to assist homeowners most in
need of financial assistance, including participation in the U.S. Treas-
ury Making Home Affordable (“MHA”) programs, which are designed
to assist eligible homeowners in a number of ways, one of which is by
modifying the terms of their mortgages. The MHA programs and the
Firm’s other loss-mitigation programs for financially troubled borrow-
ers generally represent various concessions, such as term extensions,
rate reductions and deferral of principal payments that would have
been required under the terms of the original agreement. The Firm’s
loss-mitigation programs are intended to minimize economic loss to
the Firm, while providing alternatives to foreclosure.
More detailed discussion of the domestic consumer credit environ-
ment can be found in Consumer Credit Portfolio on pages 114–123
of this Annual Report.