JP Morgan Chase 2009 Annual Report Download - page 53

JPMorgan Chase & Co./2009 Annual Report
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Asset Management net income increased from the prior year, due
to higher net revenue, offset largely by higher noninterest expense
and a higher provision for credit losses. The increase in net revenue
reflected higher valuations of the Firm’s seed capital investments, net
inflows, wider loan spreads and higher deposit balances, offset
partially by the effect of lower market levels and narrower deposit
spreads. Asset Management’s businesses reported mixed revenue
results: Institutional and Private Bank revenue were up while Retail
and Private Wealth Management revenue were down. Assets under
supervision increased for the year, due to the effect of higher market
valuations and inflows in fixed income and equity products offset
partially by outflows in cash products. The provision for credit losses
increased compared with the prior year, reflecting continued weak-
ness in the credit environment. Noninterest expense was higher,
reflecting the effect of the Bear Stearns merger, higher performance-
based compensation and higher FDIC insurance premiums, offset
largely by lower headcount-related expense.
Corporate/Private Equity net income increased in 2009, reflect-
ing elevated levels of trading gains and net interest income, securi-
ties gains, an after-tax gain from the sale of MasterCard shares and
reduced losses from Private Equity compared with 2008. Trading
gains and net interest income increased due to the Firm’s significant
purchases of mortgage-backed securities guaranteed by U.S. gov-
ernment agencies, corporate debt securities, U.S. Treasury and
government agency securities and other asset-backed securities.
These investments were generally associated with the Chief Invest-
ment Office’s management of interest rate risk and investment of
cash resulting from the excess funding the Firm continued to experi-
ence during 2009. The increase in securities was partially offset by
sales of higher-coupon instruments (part of repositioning the invest-
ment portfolio) as well as prepayments and maturities.
Firmwide, the managed provision for credit losses was $38.5
billion, up by $13.9 billion, or 56%, from the prior year. The prior
year included a $1.5 billion charge to conform Washington Mutual’s
allowance for loan losses, which affected both the consumer and
wholesale portfolios. For the purposes of the following analysis, this
charge is excluded. The consumer-managed provision for credit losses
was $34.5 billion, compared with $20.4 billion in the prior year,
reflecting an increase in the allowance for credit losses in the home
lending and credit card loan portfolios. Consumer-managed net
charge-offs were $26.3 billion, compared with $13.0 billion in the
prior year, resulting in managed net charge-off rates of 5.85% and
3.22%, respectively. The wholesale provision for credit losses was
$4.0 billion, compared with $2.7 billion in the prior year, reflecting
continued weakness in the credit environment throughout 2009.
Wholesale net charge-offs were $3.1 billion, compared with $402
million in the prior year, resulting in net charge-off rates of 1.40%
and 0.18%, respectively. The Firm’s nonperforming assets totaled
$19.7 billion at December 31, 2009, up from $12.7 billion. The total
allowance for credit losses increased by $8.7 billion from the prior
year-end, resulting in a loan loss coverage ratio at December 31,
2009, of 5.51%, compared with 3.62% at December 31, 2008.
Total stockholders’ equity at December 31, 2009, was $165.4 billion.
2010 Business outlook
The following forward-looking statements are based on the current
beliefs and expectations of JPMorgan Chase’s management and are
subject to significant risks and uncertainties. These risks and uncer-
tainties could cause the Firm’s actual results to differ materially from
those set forth in such forward-looking statements.
JPMorgan Chase’s outlook for 2010 should be viewed against the
backdrop of the global and U.S. economies, financial markets activ-
ity, the geopolitical environment, the competitive environment and
client activity levels. Each of these linked factors will affect the
performance of the Firm and its lines of business. The Firm continues
to monitor the U.S. and international economies and political envi-
ronments. The outlook for capital markets remains uncertain, and
further declines in U.S. housing prices in certain markets and in-
creases in the unemployment rate, either of which could adversely
affect the Firm’s financial results, are possible. In addition, as a result
of recent market conditions, the U.S. Congress and regulators have
increased their focus on the regulation of financial institutions; any
legislation or regulations that may be adopted as a result could limit
or restrict the Firm’s operations, and could impose additional costs
on the Firm in order to comply with such new laws or rules.
Given the potential stress on consumers from rising unemployment
and continued downward pressure on housing prices, management
remains cautious with respect to the credit outlook for the con-
sumer loan portfolios. Possible continued weakness in credit trends
could result in higher credit costs and require additions to the
consumer allowance for credit losses. Based on management’s
current economic outlook, quarterly net charge-offs could reach
$1.4 billion for the home equity portfolio, $600 million for the
prime mortgage portfolio and $500 million for the subprime mort-
gage portfolio over the next several quarters. The managed net
charge-off rate for Card Services (excluding the Washington Mu-
tual credit card portfolio) could approach 11% by the first quarter
of 2010, including the adverse timing effect of a payment holiday
program of approximately 60 basis points. The managed net
charge-off rate for the Washington Mutual credit card portfolio
could approach 24% over the next several quarters. These charge-
off rates are likely to move even higher if the economic environ-
ment deteriorates beyond management’s current expectations.
Similarly, wholesale credit costs and net charge-offs could increase
in the next several quarters if the credit environment deteriorates.
The Investment Bank continues to operate in an uncertain environ-
ment, and as noted above, results could be adversely affected if the
credit environment were to deteriorate further. Trading results can be
volatile and 2009 included elevated client volumes and spread levels.
As such, management expects Fixed Income and Equity Markets
revenue to normalize over time as conditions stabilize.
In the Retail Banking segment within Retail Financial Services,
although management expects underlying growth, results will be
under pressure from the credit environment and ongoing lower
consumer spending levels. In addition, the Firm has made changes,
consistent with (and in certain respects, beyond) the requirements of
newly-enacted legislation, in its policies relating to non-sufficient