JP Morgan Chase 2008 Annual Report Download - page 28

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seize opportunities and continue to build and invest in
our market-leading businesses, even in a highly
stressed environment.
We maintain a long-term commitment to the dividend
and still view a 30%-40% payout ratio of normalized
earnings as ultimately reasonable. We will continue
to review all relevant criteria to ensure the ongoing
strength of our capital base and will await a more stable
economic environment before increasing the dividend.
D. Comments on TARP
While the decision to reduce our dividend was not
directly related to accepting TARP, it does provide us
with additional capital – about $5 billion per year –
which could position us to repay TARP funds sooner
than otherwise would have been possible. We, of course,
would do this in consultation with our regulators.
Many people would like us to repay the TARP funds
as soon as we can; some are angry over the changing
government conditions relating to the acceptance of
TARP funds; and some would like to see swift repay-
ment as a matter of principle.
The reason we accepted TARP still stands – we believed
it was in the best interests of the United States and the
banking system overall. We will not react capriciously
or out of anger in determining when to repay the
TARP funds. We will repay them only if doing so is
consistent with the best interests of our country and
our company.
E. The impact of a deep recession, and the
government’s stress test
We have been forthright and consistent in letting our
shareholders know that a recession will impact our
financial results, a severe recession even more so. And
that’s if we do everything right. Last year, we noted
that the recession would have a significant impact
on credit and that in a difficult environment, “credit
losses could rise significantly, by as much as $5 billion
over time, which would require increases in loan loss
reserves.” Managed net charge-offs were $13 billion in
2008, up from $7 billion in 2007. Our current view is
that 2009 charge-offs will be even higher.
The recession will ripple through and affect all of our
consumer and commercial credit exposures – some
worse than others. In addition to higher charge-offs, it
will require substantial additions to reserves, which we
have increased from $10 billion at the end of 2007 to
$24 billion at the end of 2008. We already said last
year how bad we thought mortgage and home equity
losses might get, and, unfortunately, they have become
even worse. The severity of this recession also could
have a dramatic impact on credit card losses; we now
expect a 9% unemployment rate to lead to charge-offs
of higher than 9%. (In the past, we would expect
unemployment of 9% to lead to charge-offs of 7% or
more. Now, however, we believe that the combined
effect of unemployment with the major housing down-
turn will lead to a higher charge-off rate.)
The Treasury, in conjunction with the OCC, FDIC and
Federal Reserve, has launched a stress test program to
ensure that the 19 largest banks (those with more than
5
10
15%
2004 2005 2006
(a) 2007 2008
6%
8%
13% 13%
4%
1
2
3
4
$5
2004 2005 2006
(a) 2007
$1.81
$2.38
$4.04 $4.38
2008
$1.37
Return on Equity
Earnings per Share
(a) 2004 data are
unaudited pro
forma combined,
reflecting the
merger of
JPMorgan Chase
and Bank One
(fully diluted)