JP Morgan Chase 2006 Annual Report Download - page 45

CARD SERVICES
With more than 154 million cards in circulation and $153 billion
in managed loans, Chase Card Services is one of the nation’s
largest credit card issuers. Customers used Chase cards for over
$339 billion worth of transactions in 2006.
Chase offers a wide variety of general-purpose cards to satisfy
the needs of individual consumers, small businesses and partner
organizations, including cards issued with AARP, Amazon,
Continental Airlines, Marriott, Southwest Airlines, Sony, United
Airlines, Walt Disney Company and many other well-known
brands and organizations. Chase also issues private-label cards
with Circuit City, Kohl’s, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture with JPMorgan
Chase and First Data Corporation, is the largest processor of
MasterCard and Visa payments in the world, having handled
over 18 billion transactions in 2006.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the
credit performance of its credit card loans, both loans on the balance sheet
and loans that have been securitized. For further information, see Explanation
and reconciliation of the Firm’s use of non-GAAP financial measures on pages
32–33 of this Annual Report. Managed results exclude the impact of credit
card securitizations on Total net revenue, the Provision for credit losses, net
charge-offs and loan receivables. Securitization does not change reported Net
income; however, it does affect the classification of items on the Consolidated
statements of income and Consolidated balance sheets.
Selected income statement data – managed basis
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(c)
Revenue
Credit card income $ 2,587 $3,351 $2,179
All other income 357 212 192
Noninterest revenue 2,944 3,563 2,371
Net interest income 11,801 11,803 8,374
Total net revenue(a) 14,745 15,366 10,745
Provision for credit losses(b) 4,598 7,346 4,851
Noninterest expense
Compensation expense 1,003 1,081 893
Noncompensation expense 3,344 3,170 2,485
Amortization of intangibles 739 748 505
Total noninterest expense(a) 5,086 4,999 3,883
Income before income tax expense(a) 5,061 3,021 2,011
Income tax expense 1,855 1,114 737
Net income $ 3,206 $ 1,907 $ 1,274
Memo: Net securitization gains/
(amortization) $82$ 56 $ (8)
Financial metrics
ROE 23% 16% 17%
Overhead ratio 34 33 36
(a) As a result of the integration of Chase Merchant Services and Paymentech merchant
processing businesses into a joint venture, beginning in the fourth quarter of 2005, Total
net revenue, Total noninterest expense and Income before income tax expense have been
reduced to reflect the deconsolidation of Paymentech. There was no impact to Net income.
(b) 2005 includes a $100 million special provision related to Hurricane Katrina; the remaining
unused portion was released in 2006.
(c) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
JPMorgan Chase & Co. / 2006 Annual Report 43
To illustrate underlying business trends, the following discussion of CS’ per-
formance assumes that the deconsolidation of Paymentech had occurred as of
the beginning of 2004. The effect of the deconsolidation would have reduced
Total net revenue, primarily in Noninterest revenue, and Total noninterest
expense, but would not have had any impact on Net income for each period.
The following table presents a reconciliation of CS’ managed basis to an
adjusted basis to disclose the effect of the deconsolidation of Paymentech on
CS’ results for the periods presented.
Reconciliation of Card Services’ managed results to an adjusted
basis to disclose the effect of the Paymentech deconsolidation
Year ended December 31,
(in millions) 2006 2005 2004(a)
Noninterest revenue
Managed for the period $ 2,944 $ 3,563 $ 2,371
Adjustment for Paymentech —(422) (276)
Adjusted Noninterest revenue $ 2,944 $ 3,141 $ 2,095
Total net revenue
Managed for the period $14,745 $15,366 $10,745
Adjustment for Paymentech —(435) (283)
Adjusted Total net revenue $14,745 $14,931 $10,462
Total noninterest expense
Managed for the period $ 5,086 $ 4,999 $ 3,883
Adjustment for Paymentech —(389) (252)
Adjusted Total noninterest expense $ 5,086 $ 4,610 $ 3,631
(a) 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 $3.2 billion was up by $1.3 billion, or 68%, from the prior
year. Results were driven by a lower provision for credit losses due to signifi-
cantly lower bankruptcy filings.
End-of-period managed loans of $152.8 billion increased by $10.6 billion, or
7%, from the prior year. Average managed loans of $141.1 billion increased
by $4.7 billion, or 3%, from the prior year. Compared with the prior year,
both average managed and end-of-period managed loans continued to be
affected negatively by higher customer payment rates. Management believes
that contributing to the higher payment rates are the new minimum payment
rules and a higher proportion of customers in rewards-based programs.
The current year benefited from organic growth and reflected acquisitions of
two loan portfolios. The first portfolio was the Sears Canada credit card busi-
ness, which closed in the fourth quarter of 2005. The Sears Canada portfolio’s
average managed loan balances were $2.1 billion in the current year and
$291 million in the prior year. The second purchase was the Kohl’s private
label portfolio, which closed in the second quarter of 2006. The Kohl’s portfo-
lio average and period-end managed loan balances for 2006 were $1.2 bil-
lion and $2.5 billion, respectively.
Total net managed revenue of $14.7 billion was down by $186 million, or 1%
from the prior year. Net interest income of $11.8 billion was flat to the prior
year. Net interest income benefited from an increase in average managed loan
balances and lower revenue reversals associated with lower charge-offs. These
increases were offset by attrition of mature, higher spread balances as a result
of higher payment rates and high er cost of funds on balance growth in promo-
tional, introductory and transactor loan balances, which increased due to con-
tinued investment in marketing. Noninterest revenue of $2.9 billion was down