JP Morgan Chase 2006 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
28 JPMorgan Chase & Co. / 2006 Annual Report
The following section provides a comparative discussion of JPMorgan
Chase’s consolidated results of operations on a reported basis for the
three-year period ended December 31, 2006. Factors that are related pri-
marily to a single business segment are discussed in more detail within
that business segment than they are in this consolidated section. Total net
revenue, Noninterest expense and Income tax expense have been revised
to reflect the impact of discontinued operations. For a discussion of the
Critical accounting estimates used by the Firm that affect the Consolidated
results of operations, see pages 83–85 of this Annual Report.
Revenue
Year ended December 31, (in millions) 2006 2005 2004(a)
Investment banking fees $ 5,520 $ 4,088 $ 3,536
Principal transactions 10,346 7,669 5,148
Lending & deposit related fees 3,468 3,389 2,672
Asset management, administration
and commissions 11,725 9,891 7,682
Securities gains (losses) (543) (1,336) 338
Mortgage fees and related income 591 1,054 803
Credit card income 6,913 6,754 4,840
Other income 2,175 2,684 826
Noninterest revenue 40,195 34,193 25,845
Net interest income 21,242 19,555 16,527
Total net revenue $ 61,437 $ 53,748 $ 42,372
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Total net revenue for 2006 was $61.4 billion, up by $7.7 billion, or 14%, from
the prior year. The increase was due to higher Principal transactions, primarily
from strong trading revenue results, record Asset management, administration
and commissions revenue, and record Investment banking fees. Also contribut-
ing to the increase was higher Net interest income and lower securities portfo-
lio losses. These improvements were offset partially by a decline in Other
income partly as a result of the gain recognized in 2005 on the sale of
BrownCo, and lower Mortgage fees and related income.
The increase in Investment banking fees was driven by record debt and equity
underwriting as well as strong advisory fees. For a further discussion of
Investment banking fees, which are recorded primarily in the IB, see the IB
segment results on pages 36–37 of this Annual Report.
Principal transactions revenue consists of realized and unrealized gains and
losses from trading activities, including physical commodities inventories that
are accounted for at the lower of cost or fair value, primarily in the IB, and
Private equity gains and losses, primarily in the private equity business of
Corporate. Trading revenue increased compared with 2005 due to record per-
formance in Equity and Fixed income markets. For a further discussion of
Principal transactions revenue, see the IB and Corporate segment results on
pages 36–37 and 53–54, respectively, of this Annual Report.
Lending & deposit related fees rose slightly in comparison with 2005 as a
result of higher fee income on deposit-related fees and, in part, from The
Bank of New York transaction. For a further discussion of the change in
Lending & deposit related fees, which are recorded in RFS, see the RFS seg-
ment results on pages 38–42 of this Annual Report.
The increase in Asset management, administration and commissions revenue
in 2006 was driven by growth in assets under management in AM, which
exceeded $1 trillion at the end of 2006, higher equity-related commissions in
IB and higher performance and placement fees. The growth in assets under
management reflected net asset inflows in the institutional and retail seg-
ments. Also contributing to the increase were higher assets under custody in
TSS driven by market value appreciation and new business; and growth in
depositary receipts, securities lending and global clearing, all of which were
driven by a combination of increased product usage by existing clients and
new business. In addition, commissions in the IB rose as a result of strength
across regions, partly offset by the sale of the insurance business and
BrownCo. For additional information on these fees and commissions, see the
segment discussions for AM on pages 50–52, TSS on pages 48–49 and RFS
on pages 38–42, of this Annual Report.
The favorable variance in Securities gains (losses) was due primarily to lower
Securities losses in Treasury in 2006 from portfolio repositioning activities in
connection with the management of the Firm’s assets and liabilities. For a fur-
ther discussion of Securities gains (losses), which are mostly recorded in the
Firm’s Treasury business, see the Corporate segment discussion on pages
53–54 of this Annual Report.
Mortgage fees and related income declined in comparison with 2005 reflect-
ing a reduction in net mortgage servicing revenue and higher losses on mort-
gage loans transferred to held-for-sale. These declines were offset partly by
growth in production revenue as a result of higher volume of loans sales and
wider gain on sale margins. Mortgage fees and related income exclude the
impact of NII and AFS securities gains related to mortgage activities. For a
discussion of Mortgage fees and related income, which is recorded primarily
in RFS’s Mortgage Banking business, see the Mortgage Banking discussion on
page 41 of this Annual Report.
Credit card income increased from 2005, primarily from higher customer
charge volume that favorably impacted interchange income and servicing fees
earned in connection with securitization activities, which benefited from lower
credit losses incurred on securitized credit card loans. These increases were
offset partially by increases in volume-driven payments to partners, expenses
related to reward programs, and interest paid to investors in the securitized
loans. Credit card income also was impacted negatively by the deconsolida-
tion of Paymentech in the fourth quarter of 2005.
The decrease in Other income compared with the prior year was due to a $1.3
billion pretax gain recognized in 2005 on the sale of BrownCo and lower gains
from loan workouts. Partially offsetting these two items were higher automo-
bile operating lease revenue; an increase in equity investment income, in partic-
ular, from Chase Paymentech Solutions, LLC; and a pretax gain of $103 million
on the sale of MasterCard shares in its initial public offering.
Net interest income rose due largely to improvement in Treasury’s net interest
spread and increases in wholesale liability balances, wholesale and consumer
loans, available-for-sale securities, and consumer deposits. Increases in con-
sumer and wholesale loans and deposits included the impact of The Bank of
New York transaction. These increases were offset partially by narrower
spreads on both trading-related assets and loans, a shift to narrower-spread
deposit products, RFS’s sale of the insurance business and the absence of
BrownCo in AM. The Firm’s total average interest-earning assets for 2006
were $995.5 billion, up 11% from the prior year, primarily as a result of an
increase in loans and other liquid earning assets, partially offset by a decline
in interests in purchased receivables as a result of the restructuring and
deconsolidation during the second quarter of 2006 of certain multi-seller con-
CONSOLIDATED RESULTS OF OPERATIONS