JP Morgan Chase 2005 Annual Report Download - page 27

JPMorgan Chase & Co. /2005 Annual Report 25
Executive overview
This overview of management’s discussion and analysis highlights selected
information and may not contain all of the information that is important to
readers of this Annual Report. For a more complete understanding of events,
trends and uncertainties, as well as the liquidity, capital, credit and market
risks, and the critical accounting estimates, affecting the Firm and the lines
of business, this Annual Report should be read in its entirety.
Financial performance of JPMorgan Chase
As of or for the year ended December 31,
(in millions, except per share and ratio data) 2005 2004(a) Change
Total net revenue $ 54,533 $ 43,097 27%
Provision for credit losses 3,483 2,544 37
Total noninterest expense 38,835 34,359 13
Net income 8,483 4,466 90
Net income per share – diluted 2.38 1.55 54
Average common equity 105,507 75,641 39
Return on common equity (“ROE”) 8% 6%
Loans $ 419,148 $ 402,114 4%
Total assets 1,198,942 1,157,248 4
Deposits 554,991 521,456 6
Tier 1 capital ratio 8.5% 8.7%
Total capital ratio 12.0 12.2
(a) Includes six months of the combined Firm’s results and six months of heritage JPMorgan
Chase results.
Business overview
2005 represented the Firm’s first full year as a merged company; 2004 included
six months of the combined Firm’s results and six months of heritage JPMorgan
Chase results. Therefore, comparisons between the two years are significantly
affected by the Merger. In addition, other key factors affecting 2005 results
included litigation charges to settle the Enron and Worldcom class actions, a
special provision for credit losses related to Hurricane Katrina, the impact of the
new bankruptcy legislation on credit card charge-offs and the sale of BrownCo,
as well as the global economic and market environments.
In 2005, the Firm successfully completed a number of milestones in the execution
of its Merger integration plan. Key accomplishments included: launching a
national advertising campaign that introduced a modernized Chase brand; the
conversion of 1,400 Bank One branches, 3,400 ATMs and millions of Bank One
credit cards to the Chase brand; completing the operating platform conversion
in Card Services; and executing a major systems conversion in Texas that united
400 Chase and Bank One branches and over 800 ATMs under common systems
and branding.These accomplishments resulted in continued efficiencies from
the Merger, and the Firm made significant progress toward reaching the merger-
related savings target of approximately $3.0 billion by the end of 2007. The Firm
realized approximately $1.5 billion of merger savings in 2005, bringing estimated
cumulative savings to $1.9 billion, and the annualized run-rate of savings entering
2006 is approximately $2.2 billion. In order to achieve these savings, the Firm
expensed merger-related costs of $722 million during the year, bringing the total
cumulative amount expensed since the Merger announcement to $2.1 billion.
Management continues to estimate remaining Merger costs of approximately
$0.9 billion to $1.4 billion, which are expected to be expensed over the next
two years.
The Board of Directors announced in the fourth quarter that James Dimon,
President and Chief Operating Officer, would succeed Chairman and Chief
Executive Officer William B. Harrison, Jr. as Chief Executive Officer on
December 31, 2005. Mr. Harrison remains Chairman of the Board.
The Firm reported 2005 net income of $8.5 billion, or $2.38 per share, compared
with net income of $4.5 billion, or $1.55 per share, for 2004.The return on
common equity was 8% compared with 6% in 2004.
Results included $2.0 billion in after-tax charges, or $0.57 per share, which
included nonoperating litigation charges of $1.6 billion and Merger costs of
$448 million. Excluding these charges, operating earnings were $10.5 billion, or
$2.95 per share, and return on common equity was 10%. Operating earnings
represent business results without merger-related costs, nonoperating litiga-
tion-related charges and recoveries, and costs related to conformance of
accounting policies.
In 2005, both the U.S. and global economies continued to expand. Gross
domestic product increased by an estimated 3.0% globally with the U.S.
economy growing at a slightly faster pace. The U.S. economy experienced
continued rising short-term interest rates, which were driven by Federal
Reserve Board actions during the course of the year. The federal funds rate
increased from 2.25% to 4.25% during the year, and the yield curve flattened
as long term interest rates remained broadly steady. Equity markets, both
domestic and international, reflected positive performance, with the S&P 500
up 3% and international indices increasing over 20%. Capital markets activity
was very strong during 2005, with debt and equity underwriting and merger
and acquisition activity surpassing 2004 levels. The U.S. consumer sector
showed continued strength buoyed by overall economic strength, which
benefited from good levels of employment and retail sales that increased
versus the prior year. This strength came despite slowing mortgage origination
and refinance activity as well as significantly higher bankruptcy filings due to
the new bankruptcy legislation which became effective in October 2005.
The 2005 economic environment was a contributing factor to the performance
of the Firm and each of its businesses. The overall economic expansion and
strong level of capital markets activity helped to drive new business volume
and sales growth within each business. The interest rate environment negatively
affected both wholesale and consumer loan spreads, though wholesale
liability spreads widened over the course of the year, benefiting Treasury &
Securities Services and Commercial Banking. Additionally, the credit quality of
the loan portfolio continued to remain strong, reflecting the beneficial economic
environment, despite the impacts of accelerated bankruptcy filings and
Hurricane Katrina.
The discussion that follows highlights, on an operating basis and excluding the
impact of the Merger, the performance of each of the Firm’s lines of business.
Investment Bank operating earnings benefited from higher revenue and a
continued benefit from the Provision for credit losses, which were offset by
increased compensation expense. Revenue growth was driven by higher,
although volatile, fixed income trading results, stronger equity commissions
and improved investment banking fees, all of which benefited from strength
in global capital markets activity. Investment banking fees had particular
strength in advisory, reflecting in part the benefit of the business partnership
with Cazenove, which was formed in February of 2005. As in 2004, the