JP Morgan Chase 2003 Annual Report Download - page 43

J.P. Morgan Chase & Co. / 2003 Annual Report 41
CCS is the fourth largest U.S. credit card issuer, with $52.3 billion
in managed receivables and $89.7 billion in total volume (cus-
tomer purchases, cash advances and balance transfers). In addi-
tion, CCS is the largest U.S. merchant acquirer (an entity that
contracts w ith merchants to facilitate the acceptance of transac-
tion cards), w ith annual sales volume in excess of $260 billion,
through a joint venture w ith First Data M erchant Services.
CCS’s operating results exclude the impact of credit card securitiza-
tions. CCS periodically securitizes a portion of its credit card port-
folio by transferring a pool of credit card receivables to a trust,
w hich sells securities to investors. CCS receives fee revenue for
continuing to service those receivables and additional revenue
from any interest and fees on the receivables in excess of the inter-
est paid to investors, net of credit losses and servicing fees. CCS
reports credit costs on a managed or operating basis. Credit costs
Chase Cardmember Services
Operating earnings increased by 3% over 2002 to $679 million,
driven by higher revenue, partially offset by higher credit costs
and expenses. The operating environment reflected continued
competitive pricing, a record level of bankruptcy filings and low
receivables grow th. This w as partly the result of mortgage refi-
nancing activity, w hich permitted consumers to use cash
received in their mortgage refinancings to pay dow n credit card
debt. CCS w as able to grow earnings and originate a record
number of new accounts by offering rewards-based products,
improving operating efficiency, delivering high-level customer
service and improving retention and card usage. M anagement
believes that the shift tow ards rew ards-based products positions
CCS to capture consumer w allet share in a highly competitive,
commoditized marketplace. In 2003, CCS launched several new
rewards products, including the ChasePerfect card, the
M arathon co-branded card and the GM Small Business card.
Operating revenue increased by 4% to $6.2 billion. Net interest
income increased by 2% , reflecting low er funding costs, partly
offset by a low er yield. The 4% grow th in average receivables
w as in line w ith industry trends. Noninterest revenue increased
by 6% , primarily reflecting higher interchange revenue, partially
offset by higher rebate costs. The increase in interchange rev-
enue reflects higher purchase volume due to new account
grow th and the movement tow ards higher spending using
rewards-based products. During 2003, CCS originated 4.2 million
new accounts via multiple distribution channels. CCS continues
Business-related metrics
As of or for the year ended December 31,
(in billions, except ratios) 2003 2002 Change
End-of-period outstandings $52.3 $51.1 2%
Average outstandings 50.9 49.1 4
Total volume (a) 89.7 84.0 7
New accounts (in millions) 4.2 3.7 14
Active accounts (in millions) 16.5 16.5 —
Total accounts (in millions) 30.8 29.2 5
30+ day delinquency rate 4.68% 4.67% 1bp
Net charge-off ratio 5.89 5.89 —
Overhead ratio 36 36 —
(a) Sum of total customer purchases, cash advances and balance transfers.
2003 2002
Year ended December 31, Effect of Effect of
(in millions) Reported securitizations Operating Reported securitizations Operating
Revenue $4,292 $ 1,870 $ 6,162 $ 4,500 $ 1,439 $ 5,939
Expense 2,202 — 2,202 2,156 — 2,156
Credit costs 1,034 1,870 2,904 1,314 1,439 2,753
Operating earnings 679 — 679 662 — 662
Average loans $18,514 $ 32,365 $ 50,879 $ 22,565 $ 26,519 $ 49,084
Average assets 19,176 32,365 51,541 23,316 26,519 49,835
on an operating basis are composed of the Provision for credit
losses in the Consolidated statement of income (which includes a
provision for credit card receivables in the Consolidated balance
sheet) as w ell as the credit costs associated w ith securitized credit
card loans. As the holder of the residual interest in the securitiza-
tion trust, CCS bears its share of the credit costs for securitized
loans. In JPM organ Chase’s Consolidated financial statements,
credit costs associated w ith securitized credit card loans reduce the
noninterest income remitted to the Firm from the securitization
trust. This income is reported in Credit card fees, in Fees and
commissions, over the life of the securitization.
Securitization does not change CCS’s reported versus operating
net income; how ever, it does affect the classification of items on
the Consolidated statement of income. The abbreviated financial
information presented below is prepared on a managed basis
and includes the effect of securitizations.
to make progress in cross-selling accounts to other CFS customers
(13% of new account originations). These multiple-relationship
accounts generate more revenue and comprise 11% of the
active account base.
Operating expense of $2.2 billion increased by 2% , reflecting disci-
plined expense management and Six Sigma and productivity efforts.
Grow th in expenses was primarily due to volume-related costs.
Credit costs w ere $2.9 billion, an increase of 5% from 2002. The
increase in credit costs primarily reflected 4% higher net charge-
offs due to an increase in average outstandings. Conservative risk
management and rigorous collection practices contributed to
CCS’s stable credit quality.