JP Morgan Chase 2003 Annual Report Download - page 41

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J.P. Morgan Chase & Co. / 2003 Annual Report 39
Chase Financial Services’ business results
Year ended December 31, Home Cardmember Auto Regional Middle Other
(in millions) Finance Services Finance Banking Market consumer services(a) Total
2003
Operating revenue $4,030 $ 6,162 $ 842 $ 2,576 $ 1,430 $ (408) $ 14,632
Operating expense 1,711 2,202 292 2,383 871 (195) 7,264
Credit costs 240 2,904 205 77 7 (2) 3,431
Operating earnings 1,341 679 205 70 324 (124) 2,495
2002
Operating revenue $ 2,928 $ 5,939 $ 683 $ 2,828 $ 1,451 $ (403) $ 13,426
Operating expense 1,341 2,156 248 2,229 841 (237) 6,578
Credit costs 191 2,753 174 (11) 72 (20) 3,159
Operating earnings 908 662 166 354 315 (85) 2,320
Change
Operating revenue 38% 4% 23% (9)% (1)% (1)% 9%
Operating expense 28 2 18 7 4 18 10
Credit costs 26 5 18 NM (90) 90 9
Operating earnings 48 3 23 (80) 3 (46) 8
(a) Includes the elimination of revenues and expenses related to the shared activities with Treasury Services, discontinued portfolios, support services and unallocated credit costs.
The follow ing table sets forth key revenue components of CHF’s
business.
Year ended December 31, (in millions)
Operat ing revenue 2003 2002 Change
Home Finance:
Operating revenue $3,800 $ 2,751 38%
MSR hedging revenue:
MSR valuation adjustments (785) (4,504) 83
Hedging gains (losses) 1,015 4,681 (78)
Total revenue(a) $4,030 $ 2,928 38%
(a) Includes Mortgage fees and related income, Net interest income and Securities gains.
CHF is the fourth largest mortgage originator and servicer in the
United States, w ith more than four million customers. CHF con-
ducts business in all 50 states and has approximately 17,000
employees in more than 300 locations nationw ide. CHF offers an
extensive array of residential mortgage products delivered across
a variety of distribution channels and customer touch points.
CHF comprises three key businesses: Production, Servicing and
Chase Home Finance Portfolio Lending. The Production business originates and sells
mortgages. The Servicing business manages accounts for CHF’s
four million customers. The Portfolio Lending business holds for
investment adjustable-rate first mortgage loans, home equity
and manufactured housing loans originated and purchased
through the Production channels. These three segments provide
CHF w ith balance to enable it to benefit across varying business
cycles. The Production segment is most profitable w hen mort-
gage rates are declining and origination volume is high. Alterna-
tively, the Servicing business collects more fees when rates are
rising and mortgage prepayments are low. Portfolio Lending
provides increasing NII, w ith grow th in home equity and
adjustable-rate first mortgage lending. The counter-cyclical
(Production/Servicing) and complementary (Portfolio Lending)
nature of these businesses, in combination with financial risk
management, enabled CHF to produce record earnings.
The residential mortgage market had a record year in 2003,
w ith an estimated $3.8 trillion in industry-w ide origination vol-
ume. The strong market w as driven by historically low interest
rates, higher consumer confidence, improved housing afford-
ability and exceptionally strong new and existing home sales.
CHF capitalized on this environment, achieving record levels of
CFS’s online offerings ended the year ranked No. 3 in credit
card and No. 6 in banking by Gómez Scorecards™, a service
w hich measures the quality of online financial services offerings.
CCS accounts sourced from the Internet channel reached 16%
of new account originations and represented 5% of the active
account base in 2003. In CRB, several enhancements to con-
sumer online offerings – including check imaging, statement
imaging and banking alerts – resulted in significant activation of
online capabilities by customers. CHF continued its emphasis on
providing online capabilities to its business-to-business partners
and increased its direct-to-consumer w eb usage by more than
100% . In CAF, online application processing reached 95% dealer
penetration, w hile consumer adoption of Chase’s online automo-
bile offerings continued to grow.
Business outlook
In 2004, CFS anticipates operating revenue and earnings w ill be
low er, primarily due to a decrease in production revenue in CHF,
as refinancing activity declines from the record levels set in 2003.
While CFS expects the other retail businesses to report modest
revenue growth and improved efficiencies, this grow th may not
offset the low er mortgage earnings.