JP Morgan Chase 2006 Annual Report Download - page 27

JPMorgan Chase & Co. / 2006 Annual Report 25
Business overview
The Firm reported record 2006 net income of $14.4 billion, or $4.04 per
share, compared with net income of $8.5 billion, or $2.38 per share, for
2005. The return on common equity was 13% compared with 8% in 2005.
Reported results include discontinued operations related to the exchange of
selected corporate trust businesses for the consumer, business banking and
middle-market banking businesses of The Bank of New York. Discontinued
operations produced $795 million of net income in 2006 compared with
$229 million in the prior year. The primary driver of the increase was a one-
time gain of $622 million related to the sale of the corporate trust business
(for further information on discontinued operations see Note 3 on page 97 of
this Annual Report). Income from continuing operations was a record $13.6
billion, or $3.82 per share, compared with $8.3 billion, or $2.32 per share, for
2005. For a detailed discussion of the Firm's consolidated results of opera-
tions, see pages 28–31 of this Annual Report.
Effective December 31, 2006, William B. Harrison, Jr. retired as Chairman of
the Board and was succeeded as Chairman by Chief Executive Officer James
Dimon.
The Firm’s record 2006 results were affected positively by global economic
conditions, investment in each line of business and the successful completion
of milestones in the execution of its Merger integration plan. A key milestone
related to the Merger integration was the New York Tri-state consumer con-
version, which linked the Firm’s more than 2,600 branches in 17 states on a
common systems platform (excluding 339 branches acquired from The Bank
of New York on October 1, 2006). The Tri-state conversion, along with many
other merger integration activities, resulted in continued efficiencies. As a
result the Firm made significant progress toward reaching its annual merger-
related savings target of approximately $3.0 billion by the end of 2007. The
Firm realized approximately $675 million of incremental merger savings in
2006, bringing estimated cumulative savings for 2006 to $2.5 billion, and the
annualized run-rate of savings entering 2007 is approximately $2.8 billion. In
order to achieve these savings, the Firm expensed Merger costs of $305 mil-
lion during the year (including a modest amount of costs related to The Bank
of New York transaction), bringing the total cumulative amount expensed since
the Merger announcement to approximately $3.4 billion (including capitalized
costs). Management currently estimates remaining Merger costs of approxi-
mately $400 million, which are expected to be incurred during 2007 and will
include a modest amount of expense related to the acquisition of The Bank of
New York’s consumer, business banking and middle-market banking businesses.
The Firm also continued active management of its portfolio of businesses dur-
ing 2006. Actions included: exchanging selected corporate trust businesses for
the consumer, business banking and middle-market banking businesses of The
Bank of New York; divesting the insurance underwriting business; purchasing
Collegiate Funding Services to develop further the education finance business;
acquiring Kohl’s private-label credit card portfolio; acquiring the middle and
back office operations of Paloma Partners to expand the Firm’s hedge fund
administration capabilities; and announcing a strategic alliance with Fidelity
Brokerage to provide new issue equity and fixed income products.
In 2006, the global economy continued to expand, which supported contin-
ued rapid growth in the emerging market economies. Global gross domestic
product increased by an estimated 5%, with the European economy gaining
momentum, Japan making steady progress and emerging Asian economies
expanding approximately 8%. The U.S. economy rebounded early in the year
from the prior-year hurricane disruptions, but weakened in the second half of
the year as home construction declined, automobile manufacturing weakened
and the benefit of reconstruction from hurricane disruptions dissipated. The
U.S. experienced rising interest rates during the first half of the year, as the
Federal Reserve Board increased the federal funds rate from 4.25% to
5.25%. With an anticipated slowing of economic growth, lower inflation and
stabilizing energy prices, the federal funds rate was held steady during the
second half of the year. The yield curve subsequently inverted as receding
inflation expectations pushed long-term interest rates below the federal funds
rate. Equity markets, both domestic and international, reflected positive perform-
ance, with the S&P 500 up 13% on average and international indices increasing
16% on average during 2006. Global capital markets activity was strong during
2006, with debt and equity underwriting and merger and acquisition activity
surpassing 2005 levels. Demand for wholesale loans in the U.S. was strong with
growth of approximately 14%, while U.S. consumer loans grew an estimated
4% during 2006. U.S. consumer spending grew at a solid pace, supported by
strong equity markets, low unemployment and income growth, and lower ener-
gy prices in the second half of the year. This strength came despite a significant
decline in real estate appreciation.
The 2006 economic environment was a contributing factor to the perform-
ance of the Firm and each of its businesses. The overall economic expansion,
strong level of capital markets activity and positive performance in equity
markets helped to drive new business volume and organic growth within
each of the Firm’s businesses while also contributing to the stable credit qual-
ity within the loan portfolio. However, the interest rate environment affected
negatively wholesale loan spread and consumer loan and deposit spreads.
Spreads related to wholesale liabilities widened compared with the prior year,
but this benefit declined over the course of 2006.
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 capital, liquidity, credit and market risks, and the Critical
accounting estimates, affecting the Firm and and its various lines of business, this Annual Report should be read in its entirety.
Financial performance of JPMorgan Chase
Year ended December 31,
(in millions, except per share and ratio data) 2006 2005 Change
Selected income statement data
Net revenue $ 61,437 $53,748 14%
Provision for credit losses 3,270 3,483 (6)
Noninterest expense 38,281 38,426 —
Income from continuing operations 13,649 8,254 65
Income from discontinued operations 795 229 247
Net income 14,444 8,483 70
Diluted earnings per share
Income from continuing operations $ 3.82 $ 2.32 65%
Net income 4.04 2.38 70
Return on common equity (“ROE”)
Income from continuing operations 12% 8%
Net income 13 8