JP Morgan Chase 2003 Annual Report Download - page 36

Download and view the complete annual report

Please find page 36 of the 2003 JP Morgan Chase annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 140

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
34 J.P. Morgan Chase & Co. / 2003 Annual Report
Investment Management & Private Banking
Investment Management & Private Banking pro-
vides investment management services to insti-
tutional investors, high net worth individuals
and retail customers, and it provides personal-
ized advice and solutions to wealthy individuals
and families.
Selected financial data
Year ended December 31,
(in millions, except ratios
and employees) 2003 2002 Change
Operat ing revenue:
Fees and commissions $2,207 $2,176 1%
Net interest income 467 446 5
All other revenue 204 217 (6)
Total operating revenue 2,878 2,839 1
Operat ing expense:
Compensation expense 1,193 1,125 6
Noncompensation expense 1,235 1,221 1
Total operating expense 2,428 2,346 3
Credit costs 35 85 (59)
Pre-t ax margin 415 408 2
Operat ing earnings $ 268 $261 3
Shareholder value added:
Operating earnings
less preferred dividends $261 $254 3
Less: cost of capital 655 677 (3)
Shareholder value added $(394) $(423) 7
Tangible shareholder value added(a) $108 $84 29
Average allocated capital 5,454 5,643 (3)
Average assets 33,685 35,729 (6)
Return on tangible allocated capital(a) 20% 18% 200bp
Return on allocated capital 55—
Overhead ratio 84 83 100
Pre-tax margin ratio(b) 14 14 —
Full-time equivalent employees 7,756 7,827 (1)%
(a) The Firm uses tangible shareholder value added and return on tangible allocated capital
as additional measures of the economics of the IMPB business segment. To derive these
measures, the impact of goodwill is excluded.
(b) Measures the percentage of operating earnings before taxes to total operating revenue.
01 02 03
Operating revenue
(in millions)
01 02 03
Operating earnings
(in millions, except ratios)
22% 18% 20%
$100
$200
$300
$400
$358
$261
$268
$0
$1,000
$2,000
$3,000
$4,000
$3,189
$2,839
$2,878
Return on
tangible
allocated
capital
particularly during the second half of the year. This global equity
market recovery, on a year-over-year basis, brought 2003’s aver-
age annual market levels broadly back in line w ith 2002’s aver-
age. Investment performance in core institutional products
improved w ith all major asset classes, w ith U.S. institutional fixed
income and equities markets show ing above-benchmark results.
IM PB’s operating earnings were 3% higher than in the prior
year, reflecting an improved credit portfolio, the benefits of
slightly higher revenues and managed expense grow th. Quarterly
earnings increased sequentially during the year. During the sec-
ond quarter of 2003, the Firm acquired American Century
Retirement Plan Services Inc., a provider of defined contribution
recordkeeping services, as part of its strategy to grow its U.S.
retail investment management business. The business was
renamed JPM organ Retirement Plan Services (“ RPS” ). Return on
tangible allocated capital w as 20% .
Operating revenue of $2.9 billion w as 1% higher than in
the prior year. The increase w as driven by higher Fees and
commissions and Net interest income. The grow th in Fees and
commissions reflected the acquisition of RPS and increased aver-
age equity market valuations in client portfolios, partly offset by
institutional net outflow s. The grow th in Net interest income
reflected higher brokerage account balances and spreads. The
decline in all other revenue primarily reflected nonrecurring
items in 2002.
Operating expense increased by 3% , reflecting the acquisition
of RPS, higher compensation expense, and real estate and soft-
w are w rite-offs, partly offset by the continued impact of
expense management programs.
The 59% decrease in credit costs reflected the improvement in
the quality of the credit portfolio and recoveries.
Financial results overview
Investment M anagement & Private Banking (“ IM PB” ) operating
earnings are influenced by numerous factors, including equity,
fixed income and other asset valuations; investor flow s and activ-
ity levels; investment performance; and expense and risk man-
agement. Global economic conditions rebounded in 2003, as
corporate earnings improved and the credit environment
strengthened. During 2003, global equity markets rose (as exem-
plified by the S&P 500 index, w hich rose by 26% , and the M SCI
World index, w hich rose by 31% ), and investor activity levels
increased across IMPB’s retail and private bank client bases,