JP Morgan Chase 2006 Annual Report Download - page 38

INVESTMENT BANK
JPMorgan is one of the world’s leading investment banks,
with deep client relationships and broad product capabilities.
The Investment Bank’s clients are corporations, financial institu-
tions, governments and institutional investors. The Firm offers a
full range of investment banking products and services in all
major capital markets, including advising on corporate strategy
and structure, capital raising in equity and debt markets, sophis-
ticated risk management, market-making in cash securities and
derivative instruments, and research. The IB also commits the
Firm’s own capital to proprietary investing and trading activities.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(e)
Revenue
Investment banking fees $ 5,537 $ 4,096 $ 3,572
Principal transactions 9,086 6,059 3,548
Lending & deposit related fees 517 594 539
Asset management, administration
and commissions 2,110 1,727 1,401
All other income 528 534 277
Noninterest revenue 17,778 13,010 9,337
Net interest income(a) 499 1,603 3,296
Total net revenue(b) 18,277 14,613 12,633
Provision for credit losses 191 (838) (640)
Credit reimbursement from TSS(c) 121 154 90
Noninterest expense
Compensation expense 8,190 5,792 4,896
Noncompensation expense 4,114 3,957 3,813
Total noninterest expense 12,304 9,749 8,709
Income before income tax expense 5,903 5,856 4,654
Income tax expense 2,229 2,183 1,698
Net income $ 3,674 $ 3,673 $ 2,956
Financial ratios
ROE 18% 18% 17%
ROA 0.57 0.61 0.62
Overhead ratio 67 67 69
Compensation expense as
% of total net revenue(d) 43 40 39
(a) The decline in net interest income for the periods shown is largely driven by a decline in trad-
ing-related net interest income caused by a higher proportion of noninterest-bearing net trad-
ing assets to total net trading assets, higher funding costs compared with prior-year periods,
and spread compression due to the inverted yield curve in place for most of the current year.
(b) Total Net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income
from municipal bond investments and income tax credits related to affordable housing invest-
ments, of $802 million, $752 million and $274 million for 2006, 2005 and 2004, respectively.
(c) TSS is charged a credit reimbursement related to certain exposures managed within the
IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit
reimbursement on page 35 of this Annual Report.
(d) Beginning in 2006, the Compensation expense to Total net revenue ratio is adjusted to
present this ratio as if SFAS 123R had always been in effect. IB management believes that
adjusting the Compensation expense to Total net revenue ratio for the incremental impact
of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense
to Total net revenue ratio.
(e) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
2006 compared with 2005
Net income of $3.7 billion was flat, as record revenue of $18.3 billion was offset
largely by higher compensation expense, including the impact of SFAS 123R,
and a provision for credit losses compared with a benefit in the prior year
.
Total net revenue of $18.3 billion was up $3.7 billion, or 25%, from the prior
year. Investment banking fees of $5.5 billion were a record, up 35% from the
prior year, driven by record debt and equity underwriting as well as strong
advisory fees, which were the highest since 2000. Advisory fees of $1.7 billion
The following table provides the IB’s total Net revenue by business segment:
Year ended December 31,
(in millions) 2006 2005 2004(d)
Revenue by business
Investment banking fees:
Advisory $ 1,659 $ 1,263 $ 938
Equity underwriting 1,178 864 781
Debt underwriting 2,700 1,969 1,853
Total investment banking fees 5,537 4,096 3,572
Fixed income markets(a) 8,369 7,277 6,342
Equity markets(b) 3,264 1,799 1,491
Credit portfolio(c) 1,107 1,441 1,228
Total net revenue $ 18,277 $ 14,613 $ 12,633
(a) Fixed income markets includes client and portfolio management revenue related to both
market-making and proprietary risk-taking across global fixed income markets, including
foreign exchange, interest rate, credit and commodities markets.
(b) Equities markets includes client and portfolio management revenue related to market-
making and proprietary risk-taking across global equity products, including cash instru-
ments, derivatives and convertibles.
(c) Credit portfolio revenue includes Net interest income, fees and loan sale activity, as well
as gains or losses on securities received as part of a loan restructuring, for the IB’s credit
portfolio. Credit portfolio revenue also includes the results of risk management related to
the Firm’s lending and derivative activities, and changes in the credit valuation adjustment
(“CVA”), which is the component of the fair value of a derivative that reflects the credit
quality of the counterparty. See pages 70–72 of the Credit risk management section of
this Annual Report for further discussion.
(d) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
36 JPMorgan Chase & Co. / 2006 Annual Report
were up 31% over the prior year driven primarily by strong performance in the
Americas. Debt underwriting fees of $2.7 billion were up 37% from the prior
year driven by record performance in both loan syndications and bond under-
writing. Equity underwriting fees of $1.2 billion were up 36% from the prior
year driven by global equity markets. Fixed Income Markets revenue of $8.4
billion was also a record, up 15% from the prior year driven by strength in
credit markets, emerging markets and currencies. Record Equity Markets rev-
enue of $3.3 billion increased 81%, and was driven by strength in cash equi-
ties and equity derivatives. Credit Portfolio revenue of $1.1 billion was down
23%, primarily reflecting lower gains from loan workouts.
Provision for credit losses was $191 million compared with a benefit of $838
million in the prior year. The current-year provision reflects portfolio activity;
cred-
it quality remained stable. The prior-year benefit reflected strong credit quality,
a
decline in criticized and nonperforming loans, and a higher level of recoveries.
Total noninterest expense of $12.3 billion was up by $2.6 billion, or 26%,
from the prior year. This increase was due primarily to higher performance-
based compensation, including the impact of an increase in the ratio of com-
pensation expense to total net revenue, as well as the incremental expense
related to SFAS 123R.
Return on equity was 18% on $20.8 billion of allocated capital compared with
18% on $20.0 billion in 2005.
2005 compared with 2004
Net income of $3.7 billion was up 24%, or $717 million, from the prior year. The
increase was driven by the Merger, higher revenues and an increased benefit
from the Provision for credit losses. These factors were offset partially by higher
compensation expense. Return on equity was 18%.
Total net revenue of $14.6 billion was up $2.0 billion, or 16%, over the prior
year, driven by strong Fixed Income and Equity Markets and Investment banking
fees. Investment banking fees of $4.1 billion increased 15% from the prior year
driven by strong growth in advisory fees resulting in part from the Cazenove
business partnership. Advisory revenues of $1.3 billion were up 35% from the
prior year, reflecting higher market volumes. Debt underwriting revenues of
MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.