JP Morgan Chase 2006 Annual Report Download - page 71

JPMorgan Chase & Co. / 2006 Annual Report 69
• Automotive: Automotive Original Equipment Manufacturers and suppliers
based in North America continued to be impacted negatively by a chal-
lenging operating environment in 2006. As a result, criticized exposures
grew in 2006, primarily as a result of downgrades to select names within
the portfolio. Though larger in the aggregate, most of the criticized expo-
sure remained undrawn, was performing and substantially secured.
•
Media: Media no longer represents the largest percentage of criticized
exposure since its criticized exposures decreased significantly in 2006.
This decrease was due primarily to the maturation of short-term financing
arrangements, repayments, and the planned sale to reduce select exposures.
• All other: All other in the wholesale credit exposure concentration table
on page 68 of this Annual Report at December 31, 2006, excluding HFS,
included $317.5 billion of credit exposure to 22 industry segments.
Exposures related to SPEs and high-net-worth individuals were 31% and
13%, respectively, of this category. SPEs provide secured financing (gen-
erally backed by receivables, loans or bonds on a bankruptcy-remote, non-
recourse or limited-recourse basis) originated by a diverse group of com-
panies in industries that are not highly correlated. The remaining All other
exposure is well-diversified across industries other than those related to
SPEs and high-net-worth individuals; none comprise more than 3% of
total exposure.
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to
meet the needs of customers; to generate revenues through trading activities;
to manage exposure to fluctuations in interest rates, currencies and other
markets; and to manage the Firm’s credit exposure. For further discussion of
derivative contracts, see Note 28 on pages 131–132 of this Annual Report.
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a
rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s.
The criticized component of the portfolio decreased to $5.7 billion at
December 31, 2006, from $6.2 billion at year-end 2005. The decline resulted
from upgrades, repayments and reductions in wholesale nonperforming loans
as shown on page 67 of this Annual Report.
At December 31, 2006, Healthcare, Agriculture/paper manufacturing, Business
services, and Chemicals/plastics moved into the top 10 of wholesale criticized
exposure, replacing Telecom services, Airlines, Machinery and equipment manu-
facturing, and Building materials/construction.
Wholesale criticized exposure – industry concentrations
2006 2005
December 31, Credit % of Credit % of
(in millions, except ratios) exposure portfolio exposure portfolio
Automotive $ 1,442 29% $ 643 12%
Media 392 8 684 13
Consumer products 383 7 590 11
Healthcare 284 6 243 5
Retail and consumer services 278 5 288 6
Real estate 243 5 276 5
Agriculture/paper manufacturing 239 5 178 3
Business services 222 4 250 5
Utilities 183 4 295 6
Chemicals/plastics 159 3 188 4
All other 1,201 24 1,537 30
Total excluding HFS $ 5,026 100% $ 5,172 100%
Held-for-sale(a) 624 1,069
Total $ 5,650 $ 6,241
(a) HFS loans primarily relate to securitization and syndication activities; excludes purchased
nonperforming HFS loans.
Wholesale selected industry discussion
Presented below is a discussion of several industries to which the Firm has
significant exposure, as well as industries the Firm continues to monitor
because of actual or potential credit concerns. For additional information,
refer to the tables above and on the preceding page.
• Banks and finance companies: This industry group, primarily consisting of
exposure to commercial banks, is the largest segment of the Firm’s
wholesale credit portfolio. Credit quality is high, as 84% of the exposure
in this category is rated investment-grade.
• Real estate: This industry, as the second largest segment of the Firm’s
wholesale credit portfolio, continued to grow in 2006, primarily due to
improving market fundamentals and increased capital demand for the
asset class supported by the relatively low interest rate environment. Real
estate exposure is well-diversified by client, transaction type, geography,
and property type. Approximately half of this exposure is to large public
and rated real estate companies and institutions (e.g., REITS), as well as
real estate loans originated for sale into the commercial mortgage-
backed securities market. The remaining exposure is primarily to profes-
sional real estate developers, owners, or service providers and generally
involves real estate leased to third-party tenants.