JP Morgan Chase 2006 Annual Report Download - page 11

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credit better, i.e., offer more competitive pricing based
upon our proprietary knowledge of the customer. We’re
working on many other similar initiatives where our
knowledge of the customer pre-emptively positions us in
businesses such as home equity, mortgage, auto, credit
card, retail branches and small business.
Coordinate outreach to specific groups
There are many different subsets of customers we serve
who would appreciate and benefit from a coordinated
approach to their specific needs.
One clear example involves universities. Surprisingly,
we had not coordinated our outreach to this lucrative
market. Retail opened student checking accounts;
Education Finance made student loans; Card Services
issued credit cards to students and alumni; Commercial
Banking financed schools and serviced cash management
needs; and our Asset Management group managed univer-
sity funds. We’re fixing this by working on a synchronized
effort where a specialized sales team can offer a fully coor-
dinated package more effectively and more efficiently.
Expanding to serve consumers outside the United States
International consumer expansion is not without risk.
So one of our first objectives has been to add senior
individuals to our talent pool who are knowledgeable
and experienced in the international consumer area. In
addition, we are now analyzing and developing country-
specific strategies so that we can focus our efforts on the
most important opportunities. We are fortunate to have
developed strong relationships and partnerships over the
years, so we have people and companies we trust and can
rely upon for advice and access to investment opportuni-
ties around the world.
There are some essential principles supporting this effort
that we want our shareholders to understand.
• Because restrictions on acquisitions – and other laws
and regulations – differ by country, our approach must
differ by country. In some areas, we may acquire
partial interests or controlling stakes in companies,
while in others we may start de novo.
• We will not stretch excessively to make investments.
We believe that in many parts of the world, it is not
necessary to feel desperate, as if the opportunities will
exist only for a fleeting moment. We believe that as
JPMorgan Chase grows and strengthens, its opportuni-
ties will increase. We also believe that in five to 10 years,
as some countries develop and change, new and exciting
opportunities will emerge. For example, to the extent
that we would consider a merger or acquisition in
Europe, there are likely to be many more pan-European
banks to choose from in the future. In China or India,
we might be allowed to buy a controlling interest in a
bank. The set of options available to my successor will
be dramatically different from and possibly superior
to the current set of options. With that in mind, the
best thing I can do for her or him is pass on a strong
JPMorgan Chase.
Managing critical risks
The first half of this letter mentions that we were fairly
pleased with how we managed risk in 2006. But manag-
ing risk is a constant challenge.We never stop worrying
about it. Before discussing some specific risk issues, we
believe you should be able to take some comfort from
these key facts:
• Our profit margins have increased substantially, creat-
ing our best cushion for risk.
• Our balance sheet is strong and getting stronger.
Tier I Capital at the end of 2006 was 8.7%, and even
with stock buybacks, it should stay strong because of
our improving capital generation.
• Our loan loss reserves are strong, at 1.7% for both
consumer and wholesale at the end of 2006.