JP Morgan Chase 2009 Annual Report Download - page 56

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report 54
due to lower servicing fees earned in connection with CS securitiza-
tion activities, largely as a result of higher credit losses. The decrease
was partially offset by wider loan margins on securitized credit card
loans; higher merchant servicing revenue related to the dissolution of
the Chase Paymentech Solutions joint venture; and higher inter-
change income. For a further discussion of credit card income, see the
CS segment results on pages 72–74 of this Annual Report.
Other income decreased from the prior year, due predominantly to
the absence of $1.5 billion in proceeds from the sale of Visa shares
during its initial public offering in the first quarter of 2008, and a $1.0
billion gain on the dissolution of the Chase Paymentech Solutions
joint venture in the fourth quarter of 2008; and lower net securitiza-
tion income in CS. These items were partially offset by a $464 million
charge recognized in 2008 related to the repurchase of auction-rate
securities at par; the absence of a $423 million loss incurred in the
second quarter of 2008, reflecting the Firm’s 49.4% share of Bear
Stearns’ losses from April 8 to May 30, 2008; and higher valuations
on certain investments, including seed capital in AM.
Net interest income increased from the prior year, driven by the
Washington Mutual transaction, which contributed to higher average
loans and deposits. The Firm’s interest-earning assets were $1.7
trillion, and the net yield on those assets, on a fully taxable-equivalent
(“FTE”) basis, was 3.12%, an increase of 25 basis points from 2008.
Excluding the impact of the Washington Mutual transaction, the
increase in net interest income in 2009 was driven by a higher level of
investment securities, as well as a wider net interest margin, which
reflected the overall decline in market interest rates during the year.
Declining interest rates had a positive effect on the net interest mar-
gin, as rates paid on the Firm’s interest-bearing liabilities decreased
faster relative to the decline in rates earned on interest-earning
assets. These increases in net interest income were offset partially by
lower loan balances, which included the effect of lower customer
demand, repayments and charge-offs.
2008 compared with 2007
Total net revenue of $67.3 billion was down $4.1 billion, or 6%,
from the prior year. The decline resulted from the extremely chal-
lenging business environment for financial services firms in 2008.
Principal transactions revenue decreased significantly and included
net markdowns on mortgage-related positions and leveraged
lending funded and unfunded commitments, losses on preferred
securities of Fannie Mae and Freddie Mac, and losses on private
equity investments. Also contributing to the decline in total net
revenue were losses and markdowns recorded in other income,
including the Firm’s share of Bear Stearns’ losses from April 8 to
May 30, 2008. These declines were largely offset by higher net
interest income, proceeds from the sale of Visa shares in its initial
public offering, and the gain on the dissolution of the Chase Pay-
mentech joint venture.
Investment banking fees were down from the record level of the
prior year due to lower debt underwriting fees, as well as lower
advisory and equity underwriting fees, both of which were at record
levels in 2007. These declines were attributable to reduced market
activity. For a further discussion of investment banking fees, which
are primarily recorded in IB, see IB segment results on pages 63–65
of this Annual Report.
In 2008, principal transactions revenue declined by $19.7 billion
from the prior year. Trading revenue decreased by $14.5 billion to a
negative $9.8 billion, compared with positive $4.7 billion in 2007.
The decline in trading revenue was largely driven by net mark-
downs of $5.9 billion on mortgage-related exposures, compared
with $1.4 billion in net markdowns in the prior year; net mark-
downs of $4.7 billion on leveraged lending funded and unfunded
commitments, compared with $1.3 billion in net markdowns in the
prior year; losses of $1.1 billion on preferred securities of Fannie
Mae and Freddie Mac; and weaker equity trading results, compared
with a record level in 2007. In addition, trading revenue was ad-
versely affected by additional losses and costs to reduce risk related
to Bear Stearns positions. Partially offsetting the decline in trading
revenue were record results in rates and currencies, credit trading,
commodities and emerging markets, as well as strong Equity Mar-
kets client revenue; and total gains of $2.0 billion from the widen-
ing of the Firm’s credit spread on certain structured liabilities and
derivatives, compared with $1.3 billion in 2007. Private equity
results also declined substantially from the prior year, recording
losses of $908 million in 2008, compared with gains of $4.3 billion
in 2007. In addition, the first quarter of 2007 included a fair value
adjustment related to the adoption of new FASB guidance on fair
value measurement. For a further discussion of principal transac-
tions revenue, see IB and Corporate/Private Equity segment results
on pages 63–65 and 82–83, respectively, and Note 3 on pages
156–173 of this Annual Report.
Lending- and deposit-related fees rose from 2007, predominantly
resulting from higher deposit-related fees and the impact of the
Washington Mutual transaction. For a further discussion of Lend-
ing- and deposit-related fees, which are mostly recorded in RFS,
TSS and CB, see the RFS segment results on pages 66–71, the TSS
segment results on pages 77–78 and the CB segment results on
pages 75–76 of this Annual Report.
The decline in asset management, administration and commissions
revenue compared with 2007 was driven by lower asset manage-
ment fees in AM, due to lower performance fees and the effect of
lower market levels. This decline was partially offset by an increase
in commissions revenue, related predominantly to higher brokerage
transaction volume within IB’s Equity Markets revenue, which
included additions from Bear Stearns’ Prime Services business; and
higher administration fees in TSS, driven by wider spreads in securi-
ties lending and increased product usage by new and existing
clients. For additional information on these fees and commissions,
see the segment discussions for IB on pages 63–65, RFS on pages
66–71, TSS on pages 77–78 and AM on pages 79–81 of this
Annual Report.
The increase in securities gains compared with the prior year was
due to the repositioning of the Corporate investment securities
portfolio, as part of managing the structural interest rate risk of the