JP Morgan Chase 2005 Annual Report Download - page 64

Management’s discussion and analysis
JPMorgan Chase & Co.
62 JPMorgan Chase & Co. /2005 Annual Report
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries, as of December 31, 2005 and 2004, were as follows:
Short-term debt Senior long-term debt
Moody’s S&P Fitch Moody’s S&P Fitch
JPMorgan Chase & Co. P-1 A-1 F1 Aa3 A+ A+
JPMorgan Chase Bank, N.A. P-1 A-1+ F1+ Aa2 AA- A+
Chase Bank USA, N.A. P-1 A-1+ F1+ Aa2 AA- A+
deposits include all U.S. deposits insured by the FDIC, up to the legal limit of
$100,000 per depositor. In 2005, core bank deposits increased approximately
8% from 2004 year-end. In addition to core retail deposits, the Firm benefits from
substantial, geographically diverse corporate liability balances originated by TSS
and CB through the normal course of business. These franchise-generated core
liability balances are also a stable and consistent source of funding due to the
nature of the businesses from which they are generated. For a further discussion
of deposit and liability balance trends, see Business Segment Results and Balance
Sheet Analysis on pages 34–35 and 55, respectively, of this Annual Report.
Additional sources of funds include a variety of both short- and long-term
instruments, including federal funds purchased, commercial paper, bank
notes, medium- and long-term debt, and capital debt securities.This funding
is managed centrally, using regional expertise and local market access, to
ensure active participation in the global financial markets while maintaining
consistent global pricing. These markets serve as a cost-effective and
diversified source of funds and are a critical component of the Firm’s liquidity
management. Decisions concerning the timing and tenor of accessing these
markets are based upon relative costs, general market conditions, prospective
views of balance sheet growth and a targeted liquidity profile.
Finally, funding flexibility is provided by the Firm’s ability to access the repo
and asset securitization markets.These markets are evaluated on an ongoing
basis to achieve an appropriate balance of secured and unsecured funding.
The ability to securitize loans, and the associated gains on those securitizations,
are principally dependent upon the credit quality and yields of the assets
securitized and are generally not dependent upon the credit ratings of the
issuing entity. Transactions between the Firm and its securitization structures
are reflected in JPMorgan Chase’s consolidated financial statements; these
relationships include retained interests in securitization trusts, liquidity facilities
and derivative transactions. For further details, see Off-balance sheet
arrangements and contractual cash obligations and Notes 13 and 27 on
pages 58–59, 108–111 and 124–125, respectively, of this Annual Report.
Issuance
Corporate credit spreads widened modestly in 2005 across most industries
and sectors. On an historical basis, credit spreads remain near historic tight
levels as corporate balance sheet cash positions are strong and corporate
profits generally healthy. JPMorgan Chase’s credit spreads performed in line
with peer spreads in 2005.
Continued strong foreign investor participation in the global corporate
markets allowed JPMorgan Chase to identify attractive opportunities globally to
further diversify its funding and capital sources while lengthening maturities.
During 2005, JPMorgan Chase issued approximately $43.7 billion of long-term
debt and capital debt securities. These issuances were offset partially by
$26.9 billion of long-term debt and capital debt securities that matured or
were redeemed and the Firm’s redemption of $200 million of preferred stock.
In addition, in 2005 the Firm securitized approximately $18.1 billion of resi-
dential mortgage loans, $15.1 billion of credit card loans and $3.8 billion of
automobile loans, resulting in pre-tax gains on securitizations of $21 million,
$101 million and $9 million, respectively. For a further discussion of loan
securitizations, see Note 13 on pages 108–111 of this Annual Report.
The Firm’s principal insurance subsidiaries had the following financial strength
ratings as of December 31, 2005:
Moody’s S&P A.M. Best
Chase Insurance Life and Annuity Company A2 A+ A
Chase Insurance Life Company A2 A+ A
The cost and availability of unsecured financing are influenced by credit ratings.
A reduction in these ratings could adversely affect the Firm’s access to liquidity
sources, increase the cost of funds, trigger additional collateral requirements
and decrease the number of investors and counterparties willing to lend.
Critical factors in maintaining high credit ratings include a stable and diverse
earnings stream, strong capital ratios, strong credit quality and risk management
controls, diverse funding sources and strong liquidity monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the
incremental cost of funds and the potential loss of funding to be negligible.
Additionally, the Firm estimates the additional funding requirements for
VIEs and other third-party commitments would not be material. In the
current environment, the Firm believes a downgrade is unlikely. For additional
information on the impact of a credit ratings downgrade on the funding
requirements for VIEs, and on derivatives and collateral agreements, see
Special-purpose entities on pages 58–59 and Ratings profile of derivative
receivables mark-to-market (“MTM”) on page 69, of this Annual Report.