JP Morgan Chase 2005 Annual Report Download - page 128

Notes to consolidated financial statements
JPMorgan Chase & Co.
126 JPMorgan Chase & Co. /2005 Annual Report
The table below presents both on-balance sheet and off-balance sheet wholesale- and consumer-related credit exposure as of December 31, 2005 and 2004:
2005 2004
Credit On-balance Off-balance Credit On-balance Off-balance
December 31, (in billions) exposure(b) sheet(b)(c) sheet(d) exposure(b) sheet(b)(c) sheet(d)
Wholesale-related:
Banks and finance companies $ 53.7 $ 20.3 $ 33.4 $ 56.2 $ 25.7 $ 30.5
Real estate 32.5 19.0 13.5 28.2 16.7 11.5
Consumer products 26.7 10.0 16.7 21.4 7.1 14.3
Healthcare 25.5 4.7 20.8 22.0 4.5 17.5
State and municipal governments 25.3 6.1 19.2 19.8 4.1 15.7
All other wholesale 389.7 169.5 220.2 394.6 174.7 219.9
Total wholesale-related 553.4 229.6 323.8 542.2 232.8 309.4
Consumer-related:
Home finance 198.6 133.5 65.1 177.9 124.7 53.2
Auto & education finance 54.7 49.0 5.7 67.9 62.7 5.2
Consumer & small business and other 20.3 14.8 5.5 25.4 15.1 10.3
Credit card receivables(a) 651.0 71.7 579.3 597.0 64.5 532.5
Total consumer-related 924.6 269.0 655.6 868.2 267.0 601.2
Total exposure $ 1,478.0 $ 498.6 $ 979.4 $ 1,410.4 $ 499.8 $ 910.6
(a) Excludes $70.5 billion and $70.8 billion of securitized credit card receivables at December 31, 2005 and 2004, respectively.
(b) Includes HFS loans.
(c) Represents loans, derivative receivables and interests in purchased receivables.
(d) Represents lending-related financial instruments.
Note 28 – Credit risk concentrations
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities or activities in the same geographic region, or when they
have similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
JPMorgan Chase regularly monitors various segments of the credit risk portfolio
to assess potential concentration risks and to obtain collateral when deemed
necessary. In the Firm’s wholesale portfolio, risk concentrations are evaluated
primarily by industry and by geographic region. In the consumer portfolio,
concentrations are evaluated primarily by product and by U.S. geographic region.
The Firm does not believe exposure to any one loan product with varying
terms (e.g., interest-only payments for an introductory period) or exposure to
loans with high loan-to-value ratios would result in a significant concentration
of credit risk. Terms of loan products and collateral coverage are included in
the Firm’s assessment when extending credit and establishing its allowance
for loan losses.
For further information regarding on–balance sheet credit concentrations
by major product and geography, see Note 11 on page 106 of this Annual
Report. For information regarding concentrations of off–balance sheet
lending-related financial instruments by major product, see Note 27 on
page 124 of this Annual Report. More information about concentrations can
be found in the following tables or discussion in the MD&A:
Wholesale exposure Page 65
Wholesale selected industry concentrations Page 66
Country exposure Page 70
Consumer real estate loan portfolio by geographic location Page 72
Note 29 – Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale.
The accounting for an asset or liability may differ based upon the type of
instrument and/or its use in a trading or investing strategy. Generally, the
measurement framework in the consolidated financial statements is one of
the following:
• at fair value on the Consolidated balance sheets, with changes in fair value
recorded each period in the Consolidated statements of income;
• at fair value on the Consolidated balance sheets, with changes in fair value
recorded each period in a separate component of Stockholders’ equity and
as part of Other comprehensive income;
• at cost (less other-than-temporary impairments), with changes in fair value
not recorded in the consolidated financial statements but disclosed in the
notes thereto; or
• at the lower of cost or fair value.
The Firm has an established and well-documented process for determining
fair values. Fair value is based upon quoted market prices, where available.
If listed prices or quotes are not available, fair value is based upon internally-
developed models that primarily use market-based or independent information
as inputs to the valuation model. Valuation adjustments may be necessary to
ensure that financial instruments are recorded at fair value. These adjustments
include amounts to reflect counterparty credit quality, liquidity and
concentration concerns and are based upon defined methodologies that
are applied consistently over time.
• Credit valuation adjustments are necessary when the market price (or
parameter) is not indicative of the credit quality of the counterparty. As
few derivative contracts are listed on an exchange, the majority of derivative
positions are valued using internally developed models that use as their
basis observable market parameters. Market practice is to quote parameters
equivalent to a AA credit rating; thus, all counterparties are assumed to
have the same credit quality. An adjustment is therefore necessary to
reflect the credit quality of each derivative counterparty and to arrive at
fair value. Without this adjustment, derivative positions would not be
appropriately valued.