JP Morgan Chase 2008 Annual Report Download - page 45

JPMorgan Chase & Co./ 2008 Annual Report 43
income. These were partially offset by spread compression in the lia-
bility and loan portfolios. The increase in the provision for credit loss-
es reflected a weakening credit environment and growth in loan bal-
ances. Total noninterest expense decreased from the prior year, due
to lower performance-based incentive compensation and volume-
based charges from service providers, predominantly offset by the
impact of the Washington Mutual transaction.
Treasury & Securities Services net income increased over the
record level set in 2007, driven by record total net revenue, partially
offset by higher noninterest expense. Worldwide Securities Services
posted record net revenue, driven by wider spreads in securities lend-
ing, foreign exchange and liability products, increased product usage
by new and existing clients, and higher liability balances. These bene-
fits were partially offset by market depreciation. Treasury Services
posted record net revenue, reflecting higher liability balances and
volume growth in electronic funds transfer products and trade loans.
Total noninterest expense increased, reflecting higher expense relat-
ed to business and volume growth, as well as continued investment
in new product platforms.
Asset Management net income decreased, driven by lower total net
revenue, offset partially by lower total noninterest expense. The decline
in revenue was due to lower performance fees and the effect of lower
markets, including the impact of lower market valuations of seed capi-
tal investments. Partially offsetting these revenue declines were higher
deposit and loan balances, the benefit of the Bear Stearns merger,
increased revenue from net asset inflows and wider deposit spreads.
The provision for credit losses rose from the prior year, reflecting an
increase in loan balances, higher net charge-offs and a weakening
credit environment. Total noninterest expense declined compared with
2007, driven by lower performance-based compensation, largely offset
by the effect of the Bear Stearns merger and higher compensation
expense resulting from increased average headcount.
Corporate/Private Equity net income declined from the 2007
level and included an extraordinary gain related to the Washington
Mutual transaction and a conforming loan loss provision. Excluding
these items, the decrease in net income from the prior year was driv-
en by private equity losses in 2008, compared with gains in 2007,
losses on preferred securities of Fannie Mae and Freddie Mac, and a
charge related to the offer to repurchase auction-rate securities.
These declines were partially offset by the proceeds from the sale of
Visa shares in its initial public offering and a gain on the dissolution
of the Chase Paymentech Solutions joint venture and the gain from
the sale of MasterCard shares. The decrease in total noninterest
expense reflected a reduction of credit card-related litigation
expense, partially offset by higher merger costs.
The Firm’s managed provision for credit losses was $24.6 billion for
2008, compared with $9.2 billion for 2007. The total consumer-man-
aged provision for credit losses was $21.3 billion, compared with
$8.3 billion in the prior year, reflecting increases in the allowance for
credit losses related to home equity, mortgage and credit card loans,
as well as higher net charge-offs. Consumer-managed net charge-
offs were $13.0 billion, compared with $6.8 billion in the prior year,
resulting in managed net charge-off rates of 3.06% and 1.97%,
respectively. The wholesale provision for credit losses was $3.3 bil-
lion, compared with $934 million in the prior year, due to an
increase in the allowance for credit losses reflecting the effect of a
weakening credit environment and loan growth. Wholesale net
charge-offs were $402 million, compared with net charge-offs of
$72 million in the prior year, resulting in net charge-off rates of
0.18% and 0.04%, respectively. The Firm had total nonperforming
assets of $12.7 billion at December 31, 2008, up from the prior-year
level of $3.9 billion.
Total stockholders’ equity at December 31, 2008, was $166.9 bil-
lion, and the Tier 1 capital ratio was 10.9%. During 2008, the Firm
raised $11.5 billion of common equity and $32.8 billion of preferred
equity, including a warrant issued to the U.S. Treasury.
2009 Business outlook
The following forward-looking statements are based upon the cur-
rent beliefs and expectations of JPMorgan Chase’s management and
are subject to significant risks and uncertainties. These risks and
uncertainties could cause JPMorgan Chase’s actual results to differ
materially from those set forth in such forward-looking statements.
JPMorgan Chase’s outlook for 2009 should be viewed against the
backdrop of the global and U.S. economies, financial markets activity,
the geopolitical environment, the competitive environment and client
activity levels. Each of these linked factors will affect the performance
of the Firm and its lines of business. In addition, as a result of recent
market conditions and events, Congress and regulators have increased
their focus on the regulation of financial institutions. The Firm’s current
expectations are for the global and U.S. economic environments to
weaken further and potentially faster, capital markets to remain under
stress, for there to be continued decline in U.S. housing prices, and for
Congress and regulators to continue to adopt legislation and regula-
tions that could limit or restrict the Firm’s operations, or impose addi-
tional costs upon the Firm in order to comply with such new laws or
rules. These factors are likely to continue to adversely impact the Firm’s
revenue, credit costs, overall business volumes and earnings.
Given the potential stress on the consumer from rising unemploy-
ment, the continued downward pressure on housing prices and the
elevated national inventory of unsold homes, management remains
extremely cautious with respect to the credit outlook for home equity,
mortgage and credit card portfolios. Management expects continued
deterioration in credit trends for the home equity, mortgage and credit
card portfolios, which will likely require additions to the consumer
loan loss allowance in 2009 or beyond. Economic data released in
early 2009 indicated that housing prices and the labor market have
weakened further since year-end, and that deterioration could continue
into late 2009. Based on management’s current economic outlook,
quarterly net charge-offs could, over the next several quarters,
reach $1.0 billion to $1.4 billion for the home equity portfolio,
$375 million to $475 million for the prime mortgage portfolio, and
$375 million to $475 million for the subprime mortgage portfolio.
Management expects the managed net charge-off rate for Card
Services (excluding the impact resulting from the acquisition of
Washington Mutual’s banking operations) to approach 7% in the first
quarter of 2009 and likely higher by the end of the year depending
on unemployment levels. These charge-off rates could increase even
further if the economic environment continues to deteriorate