JP Morgan Chase 2010 Annual Report Download - page 56

Management’s discussion and analysis
JPMorgan Chase & Co./2010 Annual Report
56
Retail Financial Services increased, reflecting an increase in
estimated future credit losses largely related to home equity, and,
to a lesser extent, option ARM loans. Total firmwide credit reserves
at December 31, 2010, were $33.0 billion, resulting in a firmwide
loan loss coverage ratio of 4.5% of total loans.
Strong client relationships and continued investments for growth
resulted in good results across most of the Firm’s businesses,
including record revenue and net income in Commercial Banking,
record revenue in Asset Management and solid results across most
other businesses. For the year, the Investment Bank ranked #1 for
Global Investment Banking Fees; Retail Financial Services added
more than 150 new branches and 5,000 salespeople, and opened
more than 1.5 million net new checking accounts; Card Services
rolled out new products and opened 11.3 million new accounts;
Treasury & Securities Services grew assets under custody to $16.1
trillion; and Asset Management reported record long-term AUM net
inflows of $69 billion.
The Firm also continued to strengthen its balance sheet during
2010, ending the year with a Tier 1 Common ratio of 9.8% and a
Tier 1 Capital ratio of 12.1%. Total stockholders’ equity at
December 31, 2010, was $176.1 billion.
Throughout 2010, JPMorgan Chase continued to support the
economic recovery by providing capital, financing and liquidity to its
clients in the U.S. and around the world. During the year, the Firm
loaned or raised capital of more than $1.4 trillion for its clients,
which included more than $10 billion of credit provided to more
than 250,000 small businesses in the U.S., an increase of more
than 50% over 2009. JPMorgan Chase also made substantial
investments in the future of its businesses, including hiring more
than 8,000 people in the U.S. alone. The Firm remains committed
to helping homeowners and preventing foreclosures. Since the
beginning of 2009, the Firm has offered 1,038,000 trial
modifications to struggling homeowners. Of the 285,000
modifications that the Firm has completed, more than half were
modified under Chase programs, and the remainder were offered
under government-sponsored or agency programs.
Although the Firm continues to face challenges, there are signs of
stability and growth returning to both the global capital markets
and the U.S. economy. The Firm intends to continue to innovate
and invest in the products that support and serve its clients and the
communities where it does business.
The discussion that follows highlights the performance of each
business segment compared with the prior year and presents results
on a managed basis. Managed basis starts with the reported U.S.
GAAP results and, for each line of business and the Firm as a
whole, includes certain reclassifications to present total net revenue
on a tax-equivalent basis. Effective January 1, 2010, the Firm
adopted accounting guidance that required it to consolidate its
Firm-sponsored credit card securitization trusts; as a result,
reported and managed basis relating to credit card securitizations
are equivalent for periods beginning after January 1, 2010. Prior to
the adoption of this accounting guidance, in 2009 and all other
prior periods, U.S. GAAP results for CS and the Firm were also
adjusted for certain reclassifications that assumed credit card loans
that had been securitized and sold by CS remained on the
Consolidated Balance Sheets. These adjustments (“managed
basis”) had no impact on net income as reported by the Firm as a
whole or by the lines of business. For more information about
managed basis, as well as other non-GAAP financial measures used
by management to evaluate the performance of each line of
business, see pages 64–66 of this Annual Report.
Investment Bank net income decreased from the prior year,
reflecting lower net revenue and higher noninterest expense,
partially offset by a benefit from the provision for credit losses and
gains of $509 million from the widening of the Firm’s credit spread
on certain structured and derivative liabilities (compared with losses
of $2.3 billion on the tightening of the spread on those liabilities in
the prior year). The decrease in net revenue was driven by a decline
in Fixed Income Markets revenue as well as lower investment
banking fees. The provision for credit losses was a benefit in 2010,
compared with an expense in 2009, and reflected a reduction in
the allowance for loan losses, largely related to net repayments and
loan sales. Noninterest expense increased, driven by higher
noncompensation expense, including increased litigation reserves,
as well as higher compensation expense, including the impact of
the U.K. Bank Payroll Tax.
Retail Financial Services net income increased significantly from
the prior year, driven by a lower provision for credit losses, partially
offset by increased noninterest expense and lower net revenue. Net
revenue decreased, driven by lower deposit-related fees (including
the impact of the legislative changes related to non-sufficient funds
and overdraft fees), and lower loan balances. These decreases were
partially offset by a shift to wider-spread deposit products, and
growth in debit card income and auto operating lease income. The
provision for credit losses decreased from the 2009 level, reflecting
improved delinquency trends and reduced net charge-offs. The
provision also reflected an increase in the allowance for loan losses
for the purchased credit-impaired portfolio, partially offset by a
reduction in the allowance for loan losses, predominantly for the
mortgage loan portfolios. Noninterest expense increased from the
prior year, driven by higher default-related expense for mortgage
loans serviced, and sales force increases in Business Banking and
bank branches.
Card Services reported net income compared with a net loss in
the prior year, as a lower provision for credit losses was partially
offset by lower net revenue. The decrease in net revenue was
driven by a decline in net interest income, reflecting lower average
loan balances, the impact of legislative changes and a decreased
level of fees. These decreases were partially offset by a decrease in
revenue reversals associated with lower net charge-offs. The
provision for credit losses decreased from the prior year, reflecting
lower net charge-offs and a reduction in the allowance for loan
losses due to lower estimated losses. The prior-year provision
included an increase to the allowance for loan losses. Noninterest
expense increased due to higher marketing expense.