JP Morgan Chase 2008 Annual Report Download - page 48

Principal transactions revenue consists of trading revenue and private
equity gains. Trading revenue declined significantly from the 2006
level, primarily due to net markdowns in IB of $1.4 billion on sub-
prime positions, including subprime collateralized debt obligations
(“CDOs”), and $1.3 billion on leveraged lending funded loans and
unfunded commitments. Also in IB, markdowns of securitized prod-
ucts related to nonsubprime mortgages and weak credit trading per-
formance more than offset record revenue in currencies and strong
revenue in both rates and equities. Equities benefited from strong
client activity and record trading results across all products. IB’s
Credit Portfolio results increased compared with the prior year, pri-
marily driven by higher revenue from risk management activities. The
increase in private equity gains from 2006 reflected a significantly
higher level of gains, the classification of certain private equity car-
ried interest as compensation expense and a fair value adjustment in
the first quarter of 2007 on nonpublic private equity investments
resulting from the adoption of SFAS 157 (“Fair Value
Measurements”). For a further discussion of principal transactions
revenue, see IB and Corporate/Private Equity segment results on
pages 54–56 and 73–75, respectively, and Note 6 on pages
158–160 of this Annual Report.
Lending & deposit-related fees rose from the 2006 level, driven pri-
marily by higher deposit-related fees and the Bank of New York trans-
action. For a further discussion of lending & deposit-related fees,
which are mostly recorded in RFS, TSS and CB, see the RFS segment
results on pages 57–62, the TSS segment results on pages 68–69,
and the CB segment results on pages 66–67 of this Annual Report.
Asset management, administration and commissions revenue
reached a level higher than the previous record set in 2006.
Increased assets under management and higher performance and
placement fees in AM drove the record results. The 18% growth in
assets under management from year-end 2006 came from net asset
inflows and market appreciation across all segments: Institutional,
Retail, Private Bank and Private Wealth Management. TSS also con-
tributed to the rise in asset management, administration and com-
missions revenue, driven by increased product usage by new and
existing clients and market appreciation on assets under custody.
Finally, commissions revenue increased, due mainly to higher broker-
age transaction volume (primarily included within Fixed Income and
Equity Markets revenue of IB), which more than offset the sale of the
insurance business by RFS in the third quarter of 2006 and a charge
in the first quarter of 2007 resulting from accelerated surrenders of
customer annuities. For additional information on these fees and
commissions, see the segment discussions for IB on pages 54–56,
RFS on pages 57–62, TSS on pages 68–69, and AM on pages 70–72
of this Annual Report.
The favorable variance resulting from securities gains in 2007 com-
pared with securities losses in 2006 was primarily driven by improve-
ments in the results of repositioning of the Corporate investment
securities portfolio. Also contributing to the positive variance was a
$234 million gain from the sale of MasterCard shares. For a further
discussion of securities gains (losses), which are mostly recorded in
the Firm’s Corporate business, see the Corporate/Private Equity seg-
ment discussion on pages 73–75 of this Annual Report.
offset by markdowns on the mortgage warehouse and increased
reserves related to the repurchase of previously sold loans. For a dis-
cussion of mortgage fees and related income, which is recorded pri-
marily in RFS’s Consumer Lending business, see the Consumer
Lending discussion on pages 59–62 of this Annual Report.
Credit card income rose compared with the prior year, driven by
increased interchange income due to higher customer charge volume
in CS and higher debit card transaction volume in RFS, the impact of
the Washington Mutual transaction, and increased servicing fees
resulting from a higher level of securitized receivables. These results
were partially offset by increases in volume-driven payments to part-
ners and expense related to rewards programs. For a further discus-
sion of credit card income, see CS’ segment results on pages 63–65
of this Annual Report.
Other income increased compared with the prior year, due predomi-
nantly to the proceeds from the sale of Visa shares in its initial public
offering of $1.5 billion, the gain on the dissolution of the Chase
Paymentech Solutions joint venture of $1.0 billion, and gains on
sales of certain other assets. These proceeds and gains were partially
offset by markdowns on certain investments, including seed capital
in AM; a $464 million charge related to the offer to repurchase auc-
tion-rate securities at par; losses of $423 million reflecting the Firm’s
49.4% ownership in Bear Stearns’ losses from April 8 to May 30,
2008; and lower securitization income at CS.
Net interest income rose from the prior year, due predominantly to
the following: higher trading-related net interest income in IB, the
impact of the Washington Mutual transaction, wider net interest
spread in Corporate/Private Equity, growth in liability and deposit
balances in the wholesale and RFS businesses, higher consumer and
wholesale loan balances, and wider spreads on consumer loans in
RFS. The Firm’s total average interest-earning assets for 2008 were
$1.4 trillion, up 23% from the prior year, driven by higher loans,
available-for-sale (“AFS”) securities, securities borrowed, brokerage
receivables and other interest-earning assets balances. The Firm’s
total average interest-bearing liabilities for 2008 were $1.3 trillion,
up 24% from the prior year, driven by higher deposits, long-term
debt, brokerage payables and other borrowings balances. The net
interest yield on the Firm’s interest-earning assets, on a fully taxable
equivalent basis, was 2.87%, an increase of 48 basis points from the
prior year.
2007 compared with 2006
Total net revenue of $71.4 billion was up $9.4 billion, or 15%, from
the prior year. Higher net interest income, very strong private equity
gains, record asset management, administration and commissions
revenue, higher mortgage fees and related income, and record
investment banking fees contributed to the revenue growth. These
increases were offset partially by lower trading revenue.
Investment banking fees grew in 2007 to a level higher than the pre-
vious record set in 2006. Record advisory and equity underwriting
fees drove the results, partially offset by lower debt underwriting
fees. For a further discussion of investment banking fees, which are
primarily recorded in IB, see IB segment results on pages 54–56 of
this Annual Report.
JPMorgan Chase & Co./ 2008 Annual Report46
Management’s discussion and analysis