JP Morgan Chase 2008 Annual Report Download - page 57

JPMorgan Chase & Co./ 2008 Annual Report 55
billion of net markdowns on mortgage-related exposures and $4.7
billion of net markdowns on leveraged lending funded and unfunded
commitments. Revenue was also adversely impacted by additional
losses and cost to risk reduce related to Bear Stearns’ positions.
These results were offset by record performance in rates and curren-
cies, credit trading, commodities and emerging markets as well as
$814 million of gains from the widening of the Firm’s credit spread
on certain structured liabilities and derivatives. Equity Markets rev-
enue was $3.6 billion, down 7% from the prior year, reflecting weak
trading results, partially offset by strong client revenue across prod-
ucts including prime services, as well as $510 million of gains from
the widening of the Firm’s credit spread on certain structured liabili-
ties and derivatives. Credit portfolio revenue was $739 million, down
44%, driven by losses from widening counterparty credit spreads.
The provision for credit losses was $2.0 billion, an increase of $1.4
billion from the prior year, predominantly reflecting a higher
allowance for credit losses, driven by a weakening credit environ-
ment, as well as the effect of the transfer of $4.9 billion of funded
and unfunded leveraged lending commitments to retained loans
from held-for-sale in the first quarter of 2008. Net charge-offs for the
year were $105 million, compared with $36 million in the prior year.
Total nonperforming assets were $2.5 billion, an increase of $2.0 bil-
lion compared with the prior year, reflecting a weakening credit envi-
ronment. The allowance for loan losses to average loans was 4.71%
for 2008, compared with a ratio of 2.14% in the prior year.
Noninterest expense was $13.8 billion, up $770 million, or 6%, from
the prior year, reflecting higher noncompensation expense driven pri-
marily by additional expense relating to the Bear Stearns merger, off-
set partially by lower performance-based compensation expense.
Return on equity was a negative 5% on $26.1 billion of average allo-
cated capital, compared with 15% on $21.0 billion in the prior year.
2007 compared with 2006
Net income was $3.1 billion, a decrease of $535 million, or 15%,
from the prior year. The decrease reflected lower fixed income rev-
enue, a higher provision for credit losses and increased noninterest
expense, partially offset by record investment banking fees and equity
markets revenue.
Total net revenue was $18.2 billion, down $663 million, or 4%, from
the prior year. Investment banking fees were $6.6 billion, up 19%
from the prior year, driven by record fees across advisory and equity
underwriting, partially offset by lower debt underwriting fees.
Advisory fees were $2.3 billion, up 37%, and equity underwriting
fees were $1.7 billion, up 45%; both were driven by record perform-
ance across all regions. Debt underwriting fees of $2.6 billion
declined 3%, reflecting lower loan syndication and bond underwrit-
ing fees, which were negatively affected by market conditions in the
second half of the year. Fixed Income Markets revenue decreased
27% from the prior year. The decrease was due to net markdowns of
$1.4 billion on subprime positions, including subprime CDOs and net
markdowns of $1.3 billion on leveraged lending funded loans and
unfunded commitments. Fixed Income Markets revenue also
decreased due to markdowns in securitized products on nonsub-
prime mortgages and weak credit trading performance. These lower
results were offset partially by record revenue in currencies and
strong revenue in rates. Equity Markets revenue was $3.9 billion, up
13%, benefiting from strong client activity and record trading results
across all products. Credit Portfolio revenue was $1.3 billion, up
19%, primarily due to higher revenue from risk management activi-
ties, partially offset by lower gains from loan sales and workouts.
The provision for credit losses was $654 million, an increase of $463
million from the prior year. The change was due to a net increase of
$532 million in the allowance for credit losses, primarily due to port-
folio activity, which included the effect of a weakening credit envi-
ronment, and an increase in allowance for unfunded leveraged lend-
ing commitments, as well as portfolio growth. In addition, there were
$36 million of net charge-offs in 2007, compared with $31 million of
net recoveries in the prior year. The allowance for loan losses to aver-
age loans was 2.14% for 2007, compared with a ratio of 1.79% in
the prior year.
Noninterest expense was $13.1 billion, up $214 million, or 2%, from
the prior year.
Return on equity was 15% on $21.0 billion of allocated capital com-
pared with 18% on $20.8 billion in 2006.
Selected metrics
Year ended December 31,
(in millions, except headcount) 2008 2007 2006
Selected balance sheet data
(period-end)
Equity $ 33,000 $ 21,000 $ 21,000
Selected balance sheet data
(average)
Total assets $832,729 $ 700,565 $ 647,569
Trading assets–debt and
equity instruments(a) 350,812 359,775 275,077
Trading assets–derivative
receivables 112,337 63,198 54,541
Loans:
Loans retained(b) 73,108 62,247 58,846
Loans held-for-sale and loans
at fair value(a) 18,502 17,723 21,745
Total loans 91,610 79,970 80,591
Adjusted assets(c) 679,780 611,749 527,753
Equity 26,098 21,000 20,753
Headcount 27,938 25,543 23,729
(a) As a result of the adoption of SFAS 159 in the first quarter of 2007, $11.7 billion of
loans were reclassified to trading assets. Loans held-for-sale and loans at fair value
were excluded when calculating the allowance coverage ratio and net charge-off
(recovery) rate.
(b) Loans retained included credit portfolio loans, leveraged leases and other accrual
loans, and excluded loans at fair value.
(c) Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securi-
ties purchased under resale agreements and securities borrowed less securities sold,
not yet purchased; (2) assets of variable interest entities (“VIEs”) consolidated
under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and
other purposes; (4) goodwill and intangibles; (5) securities received as collateral;
and (6) investments purchased under the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility. The amount of adjusted assets is presented to
assist the reader in comparing IB’s asset and capital levels to other investment
banks in the securities industry. Asset-to-equity leverage ratios are commonly used
as one measure to assess a company’s capital adequacy. IB believes an adjusted
asset amount that excludes the assets discussed above, which were considered to
have a low risk profile, provides a more meaningful measure of balance sheet lever-
age in the securities industry.