JP Morgan Chase 2008 Annual Report Download - page 56

INVESTMENT BANK
On May 30, 2008, JPMorgan Chase merged with The Bear Stearns
Companies, Inc. The merger provided IB with a leading global prime
brokerage business and expanded the existing energy platform. It
also strengthened IB’s franchise in Equity and Fixed Income Markets,
as well as client coverage.
Selected income statement data
Year ended December 31,
(in millions, except ratios) 2008(g) 2007 2006
Revenue
Investment banking fees $ 5,907 $ 6,616 $ 5,537
Principal transactions(a) (7,042) 4,409 9,512
Lending & deposit-related fees 463 446 517
Asset management, administration
and commissions 3,064 2,701 2,240
All other income(b) (462) (78) 528
Noninterest revenue 1,930 14,094 18,334
Net interest income(c) 10,284 4,076 499
Total net revenue(d) 12,214 18,170 18,833
Provision for credit losses 2,015 654 191
Credit reimbursement from TSS(e) 121 121 121
Noninterest expense
Compensation expense 7,701 7,965 8,190
Noncompensation expense 6,143 5,109 4,670
Total noninterest expense 13,844 13,074 12,860
Income (loss) before income
tax expense (benefit) (3,524) 4,563 5,903
Income tax expense (benefit)(f) (2,349) 1,424 2,229
Net income (loss) $ (1,175) $ 3,139 $ 3,674
Financial ratios
ROE (5)% 15% 18%
ROA (0.14) 0.45 0.57
Overhead ratio 113 72 68
Compensation expense as
% of total net revenue 63 44 41
(a) The 2008 results include net markdowns on mortgage-related exposures and lever-
aged lending funded and unfunded commitments of $5.9 billion and $4.7 billion,
respectively, compared with $1.4 billion and $1.3 billion, respectively, in 2007.
(b) All other income for 2008 decreased from the prior year due to increased revenue
sharing agreements with other business segments. All other income for 2007
decreased from the prior year due mainly to losses on loan sales and lower gains on
sales of assets.
(c) Net interest income for 2008 increased from the prior year due to an increase in inter-
est-earning assets, including the addition of the Bear Stearns’ Prime Services business
combined with wider spreads on certain fixed income products. The increase in 2007
from the prior year was due primarily to an increase in interest-earning assets.
(d) Total net revenue included tax-equivalent adjustments, predominantly due to income
tax credits related to affordable housing investments and tax-exempt income from
municipal bond investments of $1.7 billion, $927 million and $802 million for 2008,
2007 and 2006, respectively.
(e) TSS is charged a credit reimbursement related to certain exposures managed within
IB credit portfolio on behalf of clients shared with TSS.
Management’s discussion and analysis
54 JPMorgan Chase & Co./ 2008 Annual Report
(f) The income tax benefit in 2008 includes the result of reduced deferred tax liabilities
on overseas earnings.
(g) Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase’s and
Bear Stearns’) results and five months of heritage JPMorgan Chase results. All prior
periods reflect heritage JPMorgan Chase results.
The following table provides IB’s total net revenue by business segment.
Year ended December 31,
(in millions) 2008(d) 2007 2006
Revenue by business
Investment banking fees:
Advisory $ 2,008 $ 2,273 $ 1,659
Equity underwriting 1,749 1,713 1,178
Debt underwriting 2,150 2,630 2,700
Total investment banking fees 5,907 6,616 5,537
Fixed income markets(a) 1,957 6,339 8,736
Equity markets(b) 3,611 3,903 3,458
Credit portfolio(c) 739 1,312 1,102
Total net revenue $ 12,214 $ 18,170 $ 18,833
Revenue by region
Americas $ 2,530 $ 8,165 $ 9,601
Europe/Middle East/Africa 7,681 7,301 7,421
Asia/Pacific 2,003 2,704 1,811
Total net revenue $ 12,214 $ 18,170 $ 18,833
(a) Fixed income markets include client and portfolio management revenue related to
both market-making and proprietary risk-taking across global fixed income markets,
including foreign exchange, interest rate, credit and commodities markets.
(b) Equities markets include client and portfolio management revenue related to market-
making and proprietary risk-taking across global equity products, including cash
instruments, derivatives and convertibles.
(c) Credit portfolio revenue includes net interest income, fees and the impact of loan
sales activity, as well as gains or losses on securities received as part of a loan
restructuring, for IB’s credit portfolio. Credit portfolio revenue also includes the results
of risk management related to the Firm’s lending and derivative activities, and
changes in the credit valuation adjustment, which is the component of the fair value
of a derivative that reflects the credit quality of the counterparty. Additionally, credit
portfolio revenue incorporates an adjustment to the valuation of the Firm’s derivative
liabilities as a result of the adoption of SFAS 157 on January 1, 2007. See pages
92–111 of the Credit Risk Management section of this Annual Report for further
discussion.
(d) Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase’s
and Bear Stearns’) results and five months of heritage JPMorgan Chase results. All
prior periods reflect heritage JPMorgan Chase results.
2008 compared with 2007
Net loss was $1.2 billion, a decrease of $4.3 billion from the prior
year, driven by lower total net revenue, a higher provision for credit
losses and higher noninterest expense, partially offset by a reduction
in deferred tax liabilities on overseas earnings.
Total net revenue was $12.2 billion, down $6.0 billion, or 33%, from
the prior year. Investment banking fees were $5.9 billion, down 11%
from the prior year, driven by lower debt underwriting and advisory
fees reflecting reduced market activity. Debt underwriting fees were
$2.2 billion, down 18% from the prior year, driven by lower loan
syndication and bond underwriting fees. Advisory fees of $2.0 billion
declined 12% from the prior year. Equity underwriting fees were
$1.7 billion, up 2% from the prior year driven by improved market
share. Fixed Income Markets revenue was $2.0 billion, compared
with $6.3 billion in the prior year. The decrease was driven by $5.9
J.P. Morgan is one of the world’s leading investment
banks, with deep client relationships and broad prod-
uct capabilities. The Investment Bank’s clients are
corporations, financial institutions, governments and
institutional investors. The Firm offers a full range of
investment banking products and services in all major
capital markets, including advising on corporate strat-
egy and structure, capital raising in equity and debt
markets, sophisticated risk management, market-
making in cash securities and derivative instruments,
prime brokerage and research. IB also selectively
commits the Firm’s own capital to principal investing
and trading activities.