JP Morgan Chase 2008 Annual Report Download - page 112

Management’s discussion and analysis
110 JPMorgan Chase & Co./ 2008 Annual Report
The allowance for credit losses increased $13.7 billion from the prior
year to $23.8 billion. The increase included $4.1 billion of allowance
related to noncredit-impaired loans acquired in the Washington
Mutual transaction and the related accounting conformity provision.
Excluding held-for-sale loans, loans carried at fair value, and pur-
chased credit-impaired consumer loans, the allowance for loan losses
represented 3.62% of loans at December 31, 2008, compared with
1.88% at December 31, 2007.
The consumer allowance for loan losses increased $10.5 billion from
the prior year as a result of the Washington Mutual transaction and
increased allowance for loan loss in residential real estate and credit
card. The increase included additions to the allowance for loan losses
of $4.7 billion driven by higher estimated losses for residential mort-
gage and home equity loans as the weak labor market and weak
overall economic conditions have resulted in increased delinquencies,
while continued weak housing prices have driven a significant
increase in loss severity. The allowance for loan losses related to
credit card increased $4.3 billion from the prior year primarily due to
the acquired allowance and subsequent conforming provision for
loan loss related to the Washington Mutual Bank acquisition and an
increase in provision for loan losses of $2.3 billion in 2008 over
2007, as higher estimated net charge-offs are expected in the port-
folio resulting from the current economic conditions.
The wholesale allowance for loan losses increase of $3.4 billion from
December 31, 2007, reflected the effect of a weakening credit envi-
ronment and the transfer of $4.9 billion of funded and unfunded
leveraged lending commitments to retained loans from held-for-sale.
To provide for the risk of loss inherent in the Firm’s process of
extending credit, an allowance for lending-related commitments is
held for both wholesale and consumer, which is reported in other lia-
bilities. The wholesale component is computed using a methodology
similar to that used for the wholesale loan portfolio, modified for
expected maturities and probabilities of drawdown and has an asset-
specific component and a formula-based component. For a further
discussion on the allowance for lending-related commitment see
Note 15 on pages 178–180 of this Annual Report. The allowance for
lending-related commitments for both wholesale and consumer was
$659 million and $850 million at December 31, 2008 and 2007,
respectively. The decrease reflects the reduction in lending-related
commitments at December 31, 2008. For more information, see page
102 of this Annual Report.
The following table presents the allowance for loan losses and net charge-offs (recoveries) by business segment at December 31, 2008 and 2007.
Net charge-offs (recoveries)
December 31, Allowance for loan losses year ended
(in millions) 2008 2007 2008 2007
Investment Bank $ 3,444 $ 1,329 $ 105 $36
Commercial Banking 2,826 1,695 288 44
Treasury & Securities Services 74 18 (2) —
Asset Management 191 112 11 (8)
Corporate/Private Equity 10 ———
Total Wholesale 6,545 3,154 402 72
Retail Financial Services 8,918 2,668 4,877 1,350
Card Services 7,692 3,407 4,556 3,116
Corporate/Private Equity 95——
Total Consumer – reported 16,619 6,080 9,433 4,466
Credit card – securitized ——3,612 2,380
Total Consumer – managed 16,619 6,080 13,045 6,846
Total $ 23,164 $ 9,234 $ 13,477 $ 6,918