JP Morgan Chase 2006 Annual Report Download - page 48

COMMERCIAL BANKING
Commercial Banking serves more than 30,000 clients, including
corporations, municipalities, financial institutions and not-for-
profit entities. These clients generally have annual revenues
ranging from $10 million to $2 billion. Commercial bankers serve
clients nationally throughout the RFS footprint and in offices
located in other major markets .
Commercial Banking offers its clients industry knowledge, experi-
ence, a dedicated service model, comprehensive solutions and local
expertise. The Firm’s broad platform positions CB to deliver
extensive product capabilities – including lending, treasury serv-
ices, investment banking and asset management – to meet its
clients’ U.S. and international financial needs.
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of
New York’s consumer, business banking and middle-market banking businesses,
adding approximately $2.3 billion in loans and $1.2 billion in deposits.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2006 2005 2004(c)
Revenue
Lending & deposit related fees $ 589 $ 572 $ 438
Asset management, administration
and commissions 67 57 30
All other income(a) 417 357 217
Noninterest revenue 1,073 986 685
Net interest income 2,727 2,502 1,593
Total net revenue 3,800 3,488 2,278
Provision for credit losses(b) 160 73 41
Noninterest expense
Compensation expense 740 654 461
Noncompensation expense 1,179 1,137 831
Amortization of intangibles 60 65 34
Total noninterest expense 1,979 1,856 1,326
Income before income tax expense 1,661 1,559 911
Income tax expense 651 608 350
Net income $ 1,010 $ 951 $ 561
Financial ratios
ROE 18% 28% 27%
ROA 1.75 1.82 1.72
Overhead ratio 52 53 58
(a) IB-related and commercial card revenues are included in All other income.
(b) 2005 includes a $35 million special provision related to Hurricane Katrina.
(c) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Commercial Banking operates in 14 of the top 15 U.S. metropolitan areas and
is divided into three businesses: Middle Market Banking, Mid-Corporate
Banking and Real Estate Banking. General coverage for corporate clients is pro-
vided by Middle Market Banking, which covers clients with annual revenues
generally ranging between $10 million and $500 million. Mid-Corporate
Banking covers clients with annual revenues generally ranging between $500
million and $2 billion and focuses on clients that have broader investment-
banking needs. The third segment, Real Estate Banking, serves large regional
and national real estate customers across the United States. In addition to
these three customer segments, CB offers several products to the Firm’s entire
customer base:
MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
46 JPMorgan Chase & Co. / 2006 Annual Report
• Asset-based financing, syndications and collateral analysis through Chase
Business Credit.
• A variety of equipment finance and leasing products, with specialties in
aircraft finance, public sector, healthcare and information technology
through Chase Equipment Leasing.
• Alternative capital strategies that provide a broader range of financing
options, such as mezzanine and second lien loans and preferred equity,
through Chase Capital Corporation.
With a large customer base across these segments and products, manage-
ment believes the CB loan portfolio is highly diversified across a broad range
of industries and geographic locations.
2006 compared with 2005
Net income of $1.0 billion increased by $59 million, or 6%, from the prior
year due to higher revenue, partially offset by higher expense and provision
for credit losses.
Record net revenue of $3.8 billion increased 9%, or $312 million. Net inter-
est income increased to $2.7 billion, primarily driven by higher liability bal-
ances and loan volumes, partially offset by loan spread compression and a
shift to narrower-spread liability products. Noninterest revenue was $1.1 bil-
lion, up $87 million, or 9%, due to record IB-related revenue and higher com-
mercial card revenue.
Revenue grew for each CB business compared with the prior year, driven
by increased treasury services, investment banking and lending revenue.
Compared with the prior year, Middle Market Banking revenue of $2.5 billion
increased by $177 million, or 8%. Mid-Corporate Banking revenue of $656
million increased by $105 million, or 19%, and Real Estate Banking revenue
of $458 million increased by $24 million, or 6%.
Provision for credit losses was $160 million, up from $73 million in the prior
year, reflecting portfolio activity and the establishment of additional allowance
for loan losses related to loans acquired from The Bank of New York, partially
offset by a release of the unused portion of the special reserve established in
2005 for Hurricane Katrina. Net charge-offs were flat compared with the prior
year. Nonperforming loans declined 56%, to $121 million.
Total noninterest expense of $2.0 billion increased by $123 million, or 7%,
from last year, primarily related to incremental Compensation expense related
to SFAS 123R and increased expense resulting from higher client usage of
Treasury Services’ products.
2005 compared with 2004
Net income of $951 million was up $390 million, or 70%, from the prior
year, primarily due to the Merger.
Total net revenue of $3.5 billion increased by $1.2 billion, or 53%, primarily
as a result of the Merger. In addition to the overall increase from the Merger,
Net interest income of $2.5 billion was positively affected by wider spreads
on higher volume related to liability balances and increased loan volumes,
partially offset by narrower loan spreads. Noninterest revenue of $986 million
was positively impacted by the Merger and higher IB revenue, partially offset
by lower deposit-related fees due to higher interest rates.
Each business within CB demonstrated revenue growth over the prior year,
primarily due to the Merger. Middle Market Banking revenue was $2.4 billion,
an increase of $861 million, or 58%, over the prior year; Mid-Corporate
Banking revenue was $551 million, an increase of $183 million, or 50%; and