JP Morgan Chase 2003 Annual Report Download - page 63

J.P. Morgan Chase & Co. / 2003 Annual Report 61
losses. This asymmetry in accounting treatment betw een loans
and lending-related commitments and the credit derivatives uti-
lized in the portfolio management activities causes earnings
volatility that is not representative of the true changes in value
of the Firm’s overall credit exposure. The M TM treatment of
both the Firm’s credit derivative hedges (“ short” credit positions)
and the CVA, w hich reflects the credit quality of derivatives
counterparty exposure (“ long” credit positions), provides some
natural offset. Additionally, the Firm actively manages its com-
mercial credit exposure through loan sales. During 2003, the
Firm sold $5.2 billion of loans and commitments, of which
$1.3 billion w as criticized.
The 2003 portfolio management activity resulted in $191 million
of losses included in Trading revenue. These losses included
$746 million related to credit derivatives that w ere used to hedge
the Firm’s credit exposure, of w hich approximately $504 million
w as associated w ith credit derivatives used to hedge accrual lend-
ing activities and the remainder primarily hedged the credit risk
of M TM derivative receivables. The losses w ere generally driven
by an overall global tightening of credit spreads. The $746 million
loss w as largely offset by $555 million of trading revenue gains
primarily related to the decrease in the M TM value of the CVA
due to credit spread tightening. During 2003, the quarterly port-
folio management Trading revenue results ranged from a net loss
of $12 million in the third quarter to a net loss of $119 million in
the second quarter.
Dealer/client activity
JPM organ Chase’s dealer activity in credit derivatives is client-
driven. The business acts as a market-maker in single-name
credit derivatives and also structures more complex transactions
for clients’ investment or risk management purposes. The credit
derivatives trading function operates w ithin the same framework
as other market-making desks. Risk limits are established and
closely monitored.
As of December 31, 2003, the total notional amounts of protec-
tion purchased and sold by the dealer business w ere $264 billion
and $276 billion, respectively. The mismatch betw een these
notional amounts is attributable to the Firm selling protection on
large, diversified, predominantly investment-grade portfolios
(including the most senior tranches) and then hedging these
positions by buying protection on the more subordinated tranches
of the same portfolios. In addition, the Firm may use securities
to hedge certain derivative positions. Consequently, w hile there
is a mismatch in notional amounts of credit derivatives, the Firm
believes the risk positions are largely matched.
Consumer credit portfolio
The Firm’s managed consumer loan portfolio totaled $171.3 bil-
lion at December 31, 2003, an increase of 10% from 2002.
Consumer lending–related commitments increased by 17% to
$176.9 billion at December 31, 2003. The follow ing table pres-
ents a summary of consumer credit exposure on a managed basis:
Consumer portfolio
As of December 31, (in millions) 2003 2002
U.S. consumer:
1–4 family residential
mortgages - first liens $54,460 $49,357
Home equity 19,252 14,643
1–4 family residential mortgages 73,712 64,000
Credit card – reported(a) 16,793 19,677
Credit card securitizations(a)(b) 34,856 30,722
Credit card – managed 51,649 50,399
Automobile financings 38,695 33,615
Other consumer (c) 7,221 7,524
Total m anaged consumer loans $ 171,277 $155,538
Lending-related commitments:
1–4 family residential mortgages $28,846 $20,016
Credit cards 141,143 123,461
Automobile financings 2,603 1,795
Other consumer 4,331 5,866
Total lending-relat ed com mitment s $ 176,923 $151,138
Total consumer credit exposure $ 348,200 $306,676
(a) At December 31, 2003, credit card securitizations included $1.1 billion of accrued interest and
fees on securitized credit card loans that were classified in Other assets, consistent with FASB
Staff Position, Accounting for Accrued Interest Receivable Related to Securitized and Sold
Receivables under SFAS 140. Prior to March 31, 2003, this balance was classified in credit card
loans.
(b) Represents the portion of JPMorgan Chase’s credit card receivables that have been securitized.
(c) Consists of installment loans (direct and indirect types of consumer finance), student loans,
unsecured revolving lines of credit and non-U.S. consumer loans.
JPM organ Chase’s consumer portfolio consists primarily of
1–4 family residential mortgages, credit cards and automobile
financings. The consumer portfolio is predominantly U.S.-based.
The follow ing pie graph provides a summary of the consumer
portfolio by loan type at year-end 2003 and each loan type’s net
charge-off rate.
Consumer managed loan portfolio
Automobile 23%
Net charge-off rate:
2003 - 0.45%
2002 - 0.57%
Other consumer 4%
Net charge-off rate:
2003 - 2.45%
2002 - 2.41%
Credit card managed 30%
Net charge-off rate:
2003 - 5.87%
2002 - 5.87%
1-4 family residential
mortgage 43%
Net charge-off rate:
2003 - 0.04%
2002 - 0.10%
The Firm’s largest component, 1–4 family residential mortgage
loans is primarily secured by first mortgages, and at December 31,
2003 comprised 43% of the total consumer portfolio. The risk of
these loans is the probability the consumer w ill default and that
the value of the home w ill be insufficient to cover the mortgage
plus carrying costs. M ortgage loans for 1–4 family residences at
December 31, 2003, increased by 10% compared w ith last year
to $54.5 billion. Home equity loans and home equity lines of
credit totaled $19.3 billion at December 31, 2003, an increase