JP Morgan Chase 2009 Annual Report Download - page 66

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report 64
of $510 million in the prior year. Credit Portfolio revenue was a loss
of $1.0 billion versus a gain of $860 million in the prior year, driven
by mark-to-market losses on hedges of retained loans compared
with gains in the prior year, partially offset by the positive net
impact of credit spreads on derivative assets and liabilities.
The provision for credit losses was $2.3 billion, compared with $2.0
billion in the prior year, reflecting continued weakness in the credit
environment. The allowance for loan losses to end-of-period loans
retained was 8.25%, compared with 4.83% in the prior year. Net
charge-offs were $1.9 billion, compared with $105 million in the
prior year. Total nonperforming assets were $4.2 billion, compared
with $2.5 billion in the prior year.
Noninterest expense was $15.4 billion, up $1.6 billion, or 11%,
from the prior year, driven by higher performance-based compensa-
tion expense, partially offset by lower headcount-related expense.
Return on Equity was 21% on $33.0 billion of average allocated
capital, compared with negative 5% on $26.1 billion of average
allocated capital in the prior year.
2008 compared with 2007
Net loss was $1.2 billion, a decrease of $4.3 billion from the prior
year, driven by lower total net revenue, a higher provision for credit
losses and higher noninterest expense, partially offset by a reduc-
tion in deferred tax liabilities on overseas earnings.
Total net revenue was $12.3 billion, down $6.0 billion, or 33%,
from the prior year. Investment banking fees were $5.9 billion,
down 11% from the prior year, driven by lower debt underwriting
and advisory fees reflecting reduced market activity. Debt under-
writing fees were $2.2 billion, down 18% from the prior year,
driven by lower loan syndication and bond underwriting fees.
Advisory fees of $2.0 billion declined 12% from the prior year.
Equity underwriting fees were $1.7 billion, up 2% from the prior
year driven by improved market share. Fixed Income Markets reve-
nue was $2.0 billion, compared with $6.3 billion in the prior year.
The decrease was driven by $5.9 billion of net markdowns on
mortgage-related exposures and $4.7 billion of net markdowns on
leveraged lending funded and unfunded commitments. Revenue
was also adversely impacted by additional losses and costs to
reduce risk related to Bear Stearns’ positions. These results were
offset by record performance in rates and currencies, credit trading,
commodities and emerging markets as well as $814 million of
gains from the widening of the Firm’s credit spread on certain
structured liabilities and derivatives. Equity Markets revenue was
$3.6 billion, down 7% from the prior year, reflecting weak trading
results, partially offset by strong client revenue across products
including prime services, as well as $510 million of gains from the
widening of the Firm’s credit spread on certain structured liabilities
and derivatives. Credit portfolio revenue was $860 million, down
40%, driven by losses from widening counterparty credit spreads.
The provision for credit losses was $2.0 billion, an increase of $1.4
billion from the prior year, predominantly reflecting a higher allow-
ance for credit losses, driven by a weakening credit environment, as
well as the effect of the transfer of $4.9 billion of funded and un-
funded leveraged lending commitments to retained loans from held-
for-sale in the first quarter of 2008. Net charge-offs for the year were
$105 million, compared with $36 million in the prior year. Total
nonperforming assets were $2.5 billion, an increase of $2.0 billion
compared with the prior year, reflecting a weakening credit environ-
ment. The allowance for loan losses to average loans was 4.71% for
2008, compared with a ratio of 2.14% in the prior year.
Noninterest expense was $13.8 billion, up $770 million, or 6%, from
the prior year, reflecting higher noncompensation expense driven
primarily by additional expense relating to the Bear Stearns merger,
offset partially by lower performance-based compensation expense.
Return on equity was negative 5% on $26.1 billion of average allocated
capital, compared with 15% on $21.0 billion in the prior year.
Selected metrics
Year ended December 31,
(in millions, except headcount)
2009 2008 2007
Selected balance sheet data
(period-end)
Loans:
Loans retained(a) $ 45,544 $ 71,357 $ 67,528
Loans held-for-sale and loans at
fair value 3,567 13,660 22,283
Total loans 49,111 85,017 89,811
Equity $ 33,000 $ 33,000 $ 21,000
Selected balance sheet data
(average)
Total assets $ 699,039 $ 832,729 $
700,565
Trading assets – debt and equity
instruments 273,624 350,812 359,775
Trading assets – derivative
receivables 96,042 112,337 63,198
Loans:
Loans retained(a) 62,722 73,108 62,247
Loans held-for-sale and loans at
fair value 7,589 18,502 17,723
Total loans 70,311 91,610 79,970
Adjusted assets(b) 538,724 679,780
611,749
Equity 33,000 26,098 21,000
Headcount 24,654 27,938 25,543
(a) Loans retained included credit portfolio loans, leveraged leases and other
accrual loans, and excluded loans held-for-sale and loans at fair value.
(b) Adjusted assets, a non-GAAP financial measure, equals total assets minus
(1) securities purchased under resale agreements and securities borrowed less
securities sold, not yet purchased; (2) assets of variable interest entities
(“VIEs”); (3) cash and securities segregated and on deposit for regulatory and
other purposes; (4) goodwill and intangibles; (5) securities received as collat-
eral; and (6) investments purchased under the Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity Facility (“AML Facility”). The amount of
adjusted assets is presented to assist the reader in comparing IB’s asset and
capital levels to other investment banks in the securities industry. Asset-to-
equity leverage ratios are commonly used as one measure to assess a com-
pany’s capital adequacy. IB believes an adjusted asset amount that excludes
the assets discussed above, which were considered to have a low risk profile,
provides a more meaningful measure of balance sheet leverage in the securi-
ties industry.