JP Morgan Chase 2010 Annual Report Download - page 118

Management’s discussion and analysis
118 JPMorgan Chase & Co./2010 Annual Report
2010 Credit risk overview
During 2010, the credit environment improved compared with
2009, resulting in decreased downgrade, default and charge-off
activity and improved delinquency trends. Despite challenging
macroeconomic conditions, particularly in the first half of 2010, the
Firm continued to actively manage its underperforming and nonac-
crual loans and reduce such exposures through repayments, loan
sales and workouts. These efforts resulted in an improvement in the
credit quality of the portfolio compared with 2009 and contributed
to the Firm’s reduction in the allowance for credit losses, particu-
larly in CS and IB. During the year and particularly in the second
half of 2010, customer demand for credit improved, loan origina-
tion activity and market liquidity improved and credit spreads
tightened from 2009.
In the wholesale portfolio, criticized assets, nonperforming assets
and charge-offs decreased from peak loss levels experienced in
2009, reflecting general improvement in the portfolio, partially
offset by continued weakness in commercial real estate (“CRE”).
Toward the end of 2010, CRE exposure showed some positive signs
of stabilization as property values improved somewhat from the
declines witnessed over the prior two years. The wholesale portfolio
continues to be actively managed, in part by conducting ongoing,
in-depth reviews of credit quality and of industry, product and client
concentrations. Underwriting guidelines across all areas of lending
have remained in focus, consistent with evolving market conditions
and the Firm’s risk management activities. Reflecting the improve-
ment in credit quality of the wholesale portfolio throughout the
year, the wholesale allowance for loan loss coverage ratio was
2.14%, compared with 3.57% at the end of 2009. For further
discussion of the wholesale credit environment and wholesale
loans, see Wholesale Credit Portfolio on pages 120–129 and Note
14 on pages 220–238 of this Annual Report.
The consumer portfolio credit performance improved from 2009
with lower delinquent loans, nonperforming assets and charge-offs.
However, credit performance continued to be negatively affected by
the economic environment. High unemployment and weak overall
economic conditions continued to have a negative impact in the
number of loans charged off, while continued weak housing prices
have resulted in an elevated severity of loss recognized on de-
faulted real estate loans. The Firm has taken proactive action to
assist homeowners most in need of financial assistance throughout
the economic downturn. The Firm is participating in the U.S. Treas-
ury’s MHA programs and continuing its other loss-mitigation efforts
for financially distressed borrowers who do not qualify for the U.S.
Treasury’s programs. In addition, over the past several years, the
Firm has taken actions to reduce risk exposure to consumer loans
by tightening both underwriting and loan qualification standards,
as well as eliminating certain products and loan origination chan-
nels. For further discussion of the consumer credit environment and
consumer loans, see Consumer Credit Portfolio on pages 129–138
and Note 14 on pages 220–238 of this Annual Report.
CREDIT PORTFOLIO
The following table presents JPMorgan Chase’s credit portfolio as
of December 31, 2010 and 2009. Total credit exposure of $1.8
trillion at December 31, 2010, decreased by $46.9 billion from
December 31, 2009, reflecting a decrease of $83.8 billion in the
consumer portfolio, partly offset by an increase of $36.9 billion in
the wholesale portfolio. During 2010, lending-related commit-
ments decreased by $36.3 billion, loans decreased by $25.2
billion and receivables from customers increased by $16.8 billion.
The overall decrease in total loans was primarily related to re-
payments, low customer demand and loan sales, partially offset
by the adoption of the accounting guidance related to VIEs,
predominantly in the wholesale portfolio.
While overall portfolio exposure declined, the Firm provided and
raised nearly $1.4 trillion in new and renewed credit and capital
for consumers, corporations, small businesses, municipalities and
not-for-profit organizations during 2010.