JP Morgan Chase 2003 Annual Report Download - page 50

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
48 J.P. Morgan Chase & Co. / 2003 Annual Report
The credit ratings of JPM organ Chase’s parent holding company
and JPM organ Chase Bank as of December 31, 2003, w ere as
follow s:
JPM organ Chase JPM organ Chase Bank
Short-term Senior Short-term Senior
debt long-term debt debt long-term debt
M oody’s P-1 A1 P-1 Aa3
S&P A-1 A+ A-1+ AA-
Fit ch F1 A+ F1 A+
Upon the announcement of the proposed merger w ith Bank One,
M oody’s and Fitch placed the ratings of the Firm under review for
possible upgrade, w hile S&P affirmed the Firm’s ratings.
Balance sheet: The Firm’s total assets increased to $771 billion at
December 31, 2003, from $759 billion at December 31, 2002. The
December 31, 2003, balance sheet includes the effect of adopting
FIN 46, which added $10 billion to total assets, including $5.8 billion
in commercial loans primarily associated w ith multi-seller asset-
backed commercial paper conduits. Commercial loans declined
$14.2 billion, excluding the impact of adopting FIN 46, as a result
of w eaker loan demand, as w ell as the Firm’s ongoing efforts to
reduce commercial exposure. Consumer loans increased $11.6 bil-
lion, led by strong grow th in mortgage and automobile loans,
driven by the favorable rate environment throughout 2003. Credit
card loans declined modestly, affected by increased securitization
activity and higher levels of payments from cash redeployed from
consumer mortgage refinancings. The securities portfolio declined
due to changes in positioning related to structural interest rate risk
management. The continued grow th in deposits contributed to the
decline in securities sold under repurchase agreements.
Sources of funds: The diversity of the Firm’s funding sources
enhances financial flexibility and limits dependence on any one
source, thereby minimizing the cost of funds. JPM organ Chase has
access to funding markets across the globe and across a broad
investor base. Liquidity is generated using a variety of both short-
term and long-term instruments, including deposits, federal funds
purchased, repurchase agreements, commercial paper, bank notes,
medium- and long-term debt, capital securities and stockholders’
equity. A major source of liquidity for JPM organ Chase Bank is pro-
vided by its large core deposit base. For this purpose, core deposits
include all U.S. domestic deposits insured by the FDIC, up to the
legal limit of $100,000 per depositor. In addition to core deposits,
the Firm benefits from substantial, stable deposit balances
originated by TSS through the normal course of its business.
Additional funding flexibility is provided by the Firm’s ability to
access the repurchase and asset securitization markets. These
alternatives are evaluated on an ongoing basis to achieve the
appropriate balance of secured and unsecured funding. The ability
to securitize loans, and the associated gains on those securitiza-
tions, are principally dependent on the credit quality and yields
of the assets securitized and are generally not dependent on the
credit ratings of the issuing entity. Transactions betw een the
Firm and its securitization structures are reflected in JPM organ
Chase’s financial statements; these relationships include retained
interests in securitization trusts, liquidity facilities and derivative
transactions. For further details, see Notes 13 and 14 on pages
100–103 and 103–106, respectively, of this Annual Report.
Issuance: Corporate credit spreads narrow ed in 2003 across
industries and sectors, reflecting the market perception that
credit risks w ere improving sharply throughout the year, as the
number of dow ngrades declined, corporate balance sheet cash
positions increased, and corporate profits exceeded expecta-
tions. JPM organ Chase’s credit spreads outperformed relative to
peer spreads follow ing the Enron settlement, reflecting reduced
headline risk and improved earnings performance. This resulted
in a positive overall shift in fixed income investor sentiment
tow ard JPM organ Chase, as evidenced by increased investor
participation in debt transactions and extension of debt
maturities. The Firm took advantage of its narrow ing credit
spreads by issuing long-term debt and capital securities
opportunistically throughout the year.
During 2003, JPM organ Chase issued approximately $17.2 billion
of long-term debt and capital securities. During the year, $8.3 bil-
lion of long-term debt and capital securities matured or was
redeemed. In addition, in 2003 the Firm securitized approximately
$13.3 billion of residential mortgage loans, $8.8 billion of credit
card loans and $4.5 billion of automobile loans, resulting in pre-
tax gains on securitizations of $168 million, $44 million and
$13 million, respectively. For a further discussion of loan securiti-
zations, see Note 13 on pages 100–103 of this Annual Report.
During 2003, the Firm adopted FIN 46 and, as a result, deconsol-
idated the trusts that issue trust preferred securities. This could
have significant implications for the Firm’s capital, because it may
change the w ay the Federal Reserve Board views the Tier 1 status
of trust preferred securities. On July 2, 2003, the Federal Reserve
Board issued a supervisory letter instructing banks and bank
holding companies to continue to include trust preferred securi-
ties in Tier 1 capital. Based on the terms of this letter and in con-
sultation w ith the Federal Reserve Board, the Firm continues to
include its trust preferred securities in Tier 1 capital. How ever,
there can be no assurance that the Federal Reserve Board will
continue to permit trust preferred securities to count as Tier 1
capital in the future. For a further discussion, see Note 18 on
pages 110–111 of this Annual Report.
Derivatives are used in liquidity risk management and funding
to achieve the Firm’s desired interest rate risk profile. The Firm
enters into derivatives contracts to swap fixed-rate debt to
floating-rate obligations and to swap floating-rate debt to fixed-
rate obligations. Derivatives contracts are also used to hedge the
variability in interest rates that arises from other floating-rate
financial instruments and forecasted transactions, such as the
rollover of short-term assets and liabilities.