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Management’s discussion and analysis
JPMorgan Chase & Co.
74 JPMorgan Chase & Co. /2005 Annual Report
The reduction in the allowance for credit losses of $322 million from
December 31, 2004, was driven primarily by continued credit strength in
the wholesale businesses, partially offset by an increase in the consumer
allowance as a result of the special provision taken in the third quarter of
2005 due to Hurricane Katrina.
Excluding held-for-sale loans, the allowance for loan losses represented
1.84% of loans at December 31, 2005, compared with 1.94% at December
31, 2004. The wholesale component of the allowance decreased to $2.5 billion
as of December 31, 2005, from $3.1 billion at year-end 2004, due to strong
credit quality across all wholesale businesses. Excluding the special provision
for Hurricane Katrina, the consumer component of the allowance would
have been $4.3 billion as of December 31, 2005, a slight increase from
December 31, 2004.
To provide for the risk of loss inherent in the Firm’s process of extending
credit, management also computes an asset-specific component and a
formula-based component for wholesale lending–related commitments.
These are computed using a methodology similar to that used for the
wholesale loan portfolio, modified for expected maturities and probabilities
of drawdown. This allowance, which is reported in Other liabilities, was
$400 million and $492 million at December 31, 2005 and 2004, respectively.
Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 29 of this Annual Report. The managed provision for credit losses reflects credit card securitiza-
tions. At December 31, 2005, securitized credit card outstandings were relatively flat compared with the prior year-end.
Provision for
For the year ended December 31,(a) Provision for loan losses lending-related commitments Total provision for credit losses
(in millions) 2005 2004 2005 2004 2005(c) 2004
Investment Bank $ (757) $ (525) $ (81) $ (115) $ (838) $ (640)
Commercial Banking 87 35 (14) 673 41
Treasury & Securities Services (1) 71——7
Asset & Wealth Management (55) (12) (1) (2) (56) (14)
Corporate 10 (110) ——10 (110)
Total Wholesale (716) (605) (95) (111) (811) (716)
Retail Financial Services 721 450 3(1) 724 449
Card Services 3,570 1,953 ——3,570 1,953
Total Consumer 4,291 2,403 3(1) 4,294 2,402
Accounting policy conformity(b) —1,085 —(227) —858
Total provision for credit losses 3,575 2,883 (92) (339) 3,483 2,544
Credit card securitization 3,776 2,898 ——3,776 2,898
Accounting policy conformity —(1,085) —227 —(858)
Total managed provision for credit losses $ 7,351 $ 4,696 $ (92) $ (112) $ 7,259 $ 4,584
(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(b) The 2004 provision for loan losses includes an increase of approximately $1.4 billion as a result of the decertification of heritage Bank One seller’s interest in credit card securitizations,
partially offset by a reduction of $357 million to conform provision methodologies.The 2004 provision for lending-related commitments reflects a reduction of $227 million to conform provision
methodologies in the wholesale portfolio.
(c) 2005 includes a $400 million special provision related to Hurricane Katrina allocated as follows: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million,
Asset & Wealth Management $3 million and Corporate $12 million.