JP Morgan Chase 2003 Annual Report Download - page 40

Chase Financial Services
Chase Financial Services is a major provider of
banking, investment and financing products
and services to consumers and small and middle
market businesses throughout the United States.
The majority of its revenues and earnings are pro-
duced by its national consumer credit businesses,
Chase Home Finance, Chase Cardmember Services
and Chase Auto Finance. It also serves as a full-
service bank for consumers and small- and medium-
sized businesses through Chase Regional Banking
and Chase Middle Market.
01 02 03
Operating revenue
(in millions)
01 02 03
Operating earnings
(in millions, except ratios)
18% 27% 28%
$0
$500
$1,000
$1,500
$2,000
$2,500
$1,414
$2,320
$2,495
$3,000
$6,000
$9,000
$12,000
$10,828
$13,426
$14,632
$0
Return on
allocated
capital
$15,000
Financial results overview
Chase Financial Services (“ CFS” ) operating earnings are
affected by numerous factors, including U.S. economic condi-
tions, the volatility and level of interest rates, and competition in
its various product lines. In response to the continuing
low –interest rate environment and competition in the market-
place, in 2003, CFS focused its efforts on grow ing or maintain-
ing market share in its various businesses, enhancing its online
banking capabilities, disciplined expense management and
maintaining the credit quality of its loan portfolios. As a result of
Selected financial data
Year ended December 31,
(in millions, except ratios
and employees) 2003 2002 Change
Operat ing revenue:
Net interest income $9,620 $8,225 17%
Fees and commissions 3,561 3,489 2
Securities gains 382 493 (23)
Mortgage fees and related income 892 988 (10)
All other revenue 177 231 (23)
Total operating revenue 14,632 13,426 9
Operat ing expense:
Compensation expense 2,870 2,536 13
Noncompensation expense 4,299 3,943 9
Severance and related costs 95 99 (4)
Total operating expense 7,264 6,578 10
Operat ing margin 7,368 6,848 8
Credit costs 3,431 3,159 9
Operat ing earnings $ 2,495 $2,320 8
Shareholder value added:
Operating earnings
less preferred dividends $2,484 $2,310 8
Less: cost of capital 1,050 1,034 2
Shareholder value added $1,434 $1,276 12
Average allocated capital $8,750 $8,612 2
Average managed loans(a) 185,761 155,926 19
Average managed assets(a) 215,216 179,635 20
Average deposits 109,802 97,464 13
Return on allocated capital 28% 27% 100bp
Overhead ratio 50 49 100
Full-time equivalent employees 46,155 43,543 6%
(a) Includes credit card receivables that have been securitized.
these efforts, 2003 CFS operating earnings w ere a record
$2.5 billion, an increase of 8% from 2002. Return on allocated
capital w as 28% , up from 27% in 2002. Shareholder value
added increased by 12% .
Operating revenue was $14.6 billion in 2003, an increase of 9%
over 2002. Net interest income increased 17% to $9.6 billion,
reflecting the positive impact of the low er interest rate environ-
ment on consumer loan originations, particularly in Chase Home
Finance (“ CHF” ), and lower funding costs. The increase w as partly
offset by reduced spreads on deposits. CHF revenue increased by
38% over the prior year, driven by strong operating revenue
(which excludes M SR hedging revenue) and, to a lesser extent,
higher M SR hedging revenue. Chase Cardmember Services
(“ CCS” ) revenue increased by 4% , the result of low er funding
costs, grow th in average receivables and higher interchange fees
earned on customer purchases. Chase Auto Finance (“ CAF” )
revenue grew 23% , driven by record originations of almost
$28 billion and low er funding costs. Chase Regional Banking
(“ CRB” ) and Chase M iddle M arket (“ CMM” ) revenues decreased
9% and 1% , respectively, as a result of low er deposit spreads from
low er interest rates, partly offset by the effect of significantly
higher deposit volumes compared w ith 2002.
Operating expense rose 10% to $7.3 billion. The increase in
expense reflects higher business volume and higher compensa-
tion costs. Partially offsetting higher expenses w ere savings
achieved through Six Sigma and other productivity efforts. The
overhead ratio increased slightly compared with a year ago.
Credit costs on a managed basis (which includes securitized
credit cards) of $3.4 billion increased by 9% compared with the
prior year. While credit quality remained stable in 2003, net
charge-offs increased by 2% . The increase in 2003 net charge-
offs w as driven by a 19% increase in average managed loans.
For a further discussion of the consumer credit portfolio, see
Credit Risk on pages 61–62 of this Annual Report.
Chase Online enrollees reached 5.2 million, an increase of
more than 50% from year-end 2002. Total online payment
transactions increased by 42% to more than 27 million.
M anagement’s discussion and analysis
J.P. M organ Chase & Co.
38 J.P. Morgan Chase & Co. / 2003 Annual Report