JP Morgan Chase 2003 Annual Report Download - page 24

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
22 J.P. Morgan Chase & Co. / 2003 Annual Report
Overview
J.P. Morgan Chase & Co. is a leading global finan-
cial services firm with assets of $771 billion and
operations in more than 50 countries. The Firm
serves more than 30 million consumers nationwide
through its retail businesses, and many of the
world's most prominent corporate, institutional
and government clients through its global whole-
sale businesses.
To tal Noninterest expense w as $21.7 billion, dow n 5% from the
prior year. In 2002, the Firm recorded $1.3 billion of charges, princi-
pally for Enron-related surety litigation and the establishment of lit-
igation reserves; and $1.2 billion for M erger and restructuring costs
related to programs announced prior to January 1, 2002. Excluding
these costs, expenses rose by 7% in 2003, reflecting higher per-
formance-related incentives; increased costs related to stock-based
compensation and pension and other postretirement expenses; and
higher occupancy expenses. The Firm began expensing stock
options in 2003. Restructuring costs associated w ith initiatives
announced after January 1, 2002, were recorded in their relevant
expense categories and totaled $630 million in 2003, dow n 29%
from 2002.
The 2003 Provision for credit losses of $1.5 billion w as dow n
$2.8 billion, or 64% , from 2002. The provision w as low er than
total net charge-offs of $2.3 billion, reflecting significant
improvement in the quality of the commercial loan portfolio.
Commercial nonperforming assets and criticized exposure levels
declined 42% and 47% , respectively, from December 31, 2002.
Consumer credit quality remained stable.
Earnings per diluted share (“ EPS” ) for the year w ere $3.24, an
increase of 305% over the EPS of $0.80 reported in 2002.
Results in 2002 w ere provided on both a reported basis and an
operating basis, w hich excluded M erger and restructuring costs
and special items. Operating EPS in 2002 w as $1.66. See page
28 of this Annual Report for a reconciliation betw een reported
and operating EPS.
Summary of segment results
The Firm’s w holesale businesses are know n globally as
“ JPM organ,” and its national consumer and middle market busi-
nesses are know n as “ Chase.” The w holesale businesses com-
prise four segments: the Investment Bank (“ IB” ), Treasury &
Securities Services (“ TSS” ), Investment Management &
Private Banking (“ IMPB” ) and JPMorgan Partners (“ JPM P” ).
IB provides a full range of investment banking and commercial
banking products and services, including advising on corporate
strategy and structure, capital raising, risk management, and
market-making in cash securities and derivative instruments in all
major capital markets. The three businesses w ithin TSS provide
debt servicing, securities custody and related functions, and
treasury and cash management services to corporations, financial
institutions and governments. The IM PB business provides invest-
ment management services to institutional investors, high net
w orth individuals and retail customers and also provides person-
alized advice and solutions to w ealthy individuals and families.
JPM P, the Firm’s private equity business, provides equity and mez-
zanine capital financing to private companies. The Firm’s national
consumer and middle market businesses, which provide lending
and full-service banking to consumers and small and middle mar-
ket businesses, comprise Chase Financial Services (“ CFS” ).
Financial performance of JPMorgan Chase
As of or for the year ended December 31,
(in millions, except per share and ratio data) 2003 2002 Change
Revenue $33,256 $29,614 12%
Noninterest expense 21,688 22,764 (5)
Provision for credit losses 1,540 4,331 (64)
Net income 6,719 1,663 304
Net income per share – diluted 3.24 0.80 305
Average common equity 42,988 41,368 4
Return on average common equity (“ ROCE” ) 16% 4% 1,200bp
Tier 1 capital ratio 8.5% 8.2% 30bp
Total capital ratio 11.8 12.0 (20)
Tier 1 leverage ratio 5.6 5.1 50
In 2003, global growth strengthened relative to the prior tw o
years. The U.S. economy improved significantly, supported by
diminishing geopolitical uncertainties, new tax relief, strong
profit grow th, low interest rates and a rising stock market.
Productivity at U.S. businesses continued to grow at an extraor-
dinary pace, as a result of ongoing investment in information
technologies. Profit margins rose to levels not seen in a long
time. New hiring remained tepid, but signs of an improving job
market emerged late in the year. Inflation fell to the low est level
in more than 40 years, and the Board of Governors of the
Federal Reserve System (the “ Federal Reserve Board” ) declared
that its long-run goal of price stability had been achieved.
Against this backdrop, J.P. M organ Chase & Co. (“ JPM organ
Chase” or the “ Firm” ) reported 2003 Net income of $6.7 bil-
lion, compared w ith Net income of $1.7 billion in 2002. All five
of the Firm’s lines of business benefited from the improved eco-
nomic conditions, w ith each reporting increased revenue over
2002. In particular, the low –interest rate environment drove
robust fixed income markets and an unprecedented mortgage
refinancing boom, resulting in record earnings in the Investment
Bank and Chase Financial Services.
Total revenue for 2003 was $33.3 billion, up 12% from 2002.
The Investment Bank’s revenue increased by approximately
$1.9 billion from 2002, and Chase Financial Services’ revenue
w as $14.6 billion in 2003, another record year.