JP Morgan Chase 2006 Annual Report Download - page 67

CREDIT PORTFOLIO
JPMorgan Chase & Co. / 2006 Annual Report 65
2006 Credit risk overview
The wholesale portfolio exhibited credit stability during 2006. There was
substantial growth in wholesale lending as a result of increased capital mar-
kets – related activity, offset by decreases in nonperforming loans and criticized
exposure of $601 million and $591 million, respectively . In 2006, the Firm
also made significant strides in its multiyear initiative to reengineer its whole-
sale credit risk systems infrastructure. Several enhancements were incorporated
into the Firm’s operating infrastructure in 2006. Overall, the initiative has
enhanced management of credit risk; timeliness and accuracy of reporting;
support of client relationships; allocation of economic capital; and compliance
with Basel II initiatives. The Firm is on target to substantially complete the ini-
tiative by year-end 2007.
Consumer credit performance generally was stable in 2006. CS adopted the
FFIEC higher minimum payment requirements, which initially resulted in high-
er payment rates than historically experienced, albeit with losses less severe
than initially anticipated. Loans impacted by Hurricane Katrina generally have
performed better than initially projected, but have experienced longer resolu-
tion timeframes, especially where real estate and business banking assets are
involved. The Allowance for loan losses related to Hurricane Katrina was
reduced by $121 million in 2006 as a result of the better than anticipated per-
formance. Bankruptcy reform legislation became effective on October 17, 2005.
This legislation prompted a “rush to file” effect that resulted in a spike in
bankruptcy filings and increased 2005 credit losses, predominantly in CS. As
expected, following this spike in filings the Firm experienced lower credit card
net charge-offs in 2006, as the record levels of bankruptcy filings in the fourth
quarter of 2005 are believed to have included bankruptcy filings that would
have occurred in 2006.
In 2006, management of the consumer segment continued to focus on portfolios
providing the most appropriate risk/reward relationship while keeping within the
Firm’s desired risk tolerance. During the past year, the majority of the new sub-
prime mortgage production was sold or classified as held-for-sale. In addition, a
portion of the subprime mortgage portfolio was transferred into the held-for-sale
account. The Firm also continued a de-emphasis of vehicle finance leasing. The
Firm experienced growth in many core consumer lending products including
home equity, credit cards, education, and business banking reflecting a focus on
the prime credit quality segment of the market.
Total credit portfolio Nonperforming Average annual
As of or for the year ended December 31,
Credit exposure assets(i) Net charge-offs net charge-off rate
(in millions, except ratios) 2006 2005 2006 2005 2006 2005 2006 2005
Total credit portfolio
Loans – reported(a) $ 483,127 $ 419,148 $ 2,077(j) $ 2,343(j) $ 3,042 $ 3,819 0.73% 1.00%
Loans – securitized(b) 66,950 70,527 ——2,210 3,776 3.28 5.47
Total managed loans(c) 550,077 489,675 2,077 2,343 5,252 7,595 1.09 1.68
Derivative receivables 55,601 49,787 36 50 NA NA NA NA
Interests in purchased receivables(d) —29,740 ——NA NA NA NA
Total managed credit-related assets 605,678 569,202 2,113 2,393 5,252 7,595 1.09 1.68
Lending-related commitments(d)(e) 1,138,959 976,705 NA NA NA NA NA NA
Assets acquired in loan satisfactions NA NA 228 197 NA NA NA NA
Total credit portfolio $ 1,744,637 $1,545,907 $ 2,341 $ 2,590 $ 5,252 $ 7,595 1.09% 1.68%
Net credit derivative hedges notional(f) $ (50,733) $ (29,882) $ (16) $ (17) NA NA NA NA
Collateral held against derivatives(g) (6,591) (6,000) NA NA NA NA NA NA
Held-for-sale
Total average HFS loans $ 38,316 $ 27,713 $87$95 NA NA NA NA
Nonperforming – purchased(h) 251 341 NA NA NA NA NA NA
(a) Loans are presented net of unearned income and net deferred loan fees of $2.3 billion and $3.0 billion at December 31, 2006 and 2005, respectively.
(b) Represents securitized credit card receivables. For further discussion of credit card securitizations, see Card Services on pages 43–45 of this Annual Report.
(c) Past-due 90 days and over and accruing includes credit card receivables of $1.3 billion and $1.1 billion, and related credit card securitizations of $962 million and $730 million at December 31, 2006 and
2005, respectively.
(d) As a result of restructuring certain multi-seller conduits the Firm administers, JPMorgan Chase deconsolidated $29 billion of Interests in purchased receivables, $3 billion of Loans and $1 billion of Securities,
and recorded a related increase of $33 billion of lending-related commitments during the second quarter of 2006.
(e) Includes wholesale unused advised lines of credit totaling $39.0 billion and $28.3 billion at December 31, 2006 and 2005, respectively, which are not legally binding. In regulatory filings with the Federal
Reserve Board, unused advised lines are not reportable. Credit card lending-related commitments of $657 billion and $579 billion at December 31, 2006 and 2005, respectively, represent the total available
credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will utilize their entire available lines of credit at the same time. The Firm can reduce or cancel a
credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(f) Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge account-
ing under SFAS 133.
(g) Represents other liquid securities collateral held by the Firm as of December 31, 2006 and 2005, respectively.
(h) Represents distressed HFS wholesale loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets.
(i) Includes nonperforming HFS loans of $120 million and $136 million as of December 31, 2006 and 2005, respectively.
(j) Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies and U.S. government sponsored
enterprises of $1.2 billion and $1.1 billion at December 31, 2006 and 2005, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by government agencies
under the Federal Family Education Loan Program, of $0.2 billion at December 31, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
The following table presents JPMorgan Chase’s credit portfolio as of
December 31, 2006 and 2005. Total credit exposure at December 31, 2006,
increased by $198.7 billion from December 31, 2005, reflecting an increase
of $80.0 billion in the wholesale credit portfolio and $118.7 billion in the
consumer credit portfolio as further described in the following pages.
In the table below, reported loans include all HFS loans, which are carried at
the lower of cost or fair value with changes in value recorded in Noninterest
revenue. However, these HFS loans are excluded from the average loan
balances used for the net charge-off rate calculations.