JP Morgan Chase 2010 Annual Report Download - page 55

JPMorgan Chase & Co./2010 Annual Report
55
EXECUTIVE OVERVIEW
This executive overview of MD&A highlights selected information
and may not contain all of the information that is important to
readers of this Annual Report. For a complete description of events,
trends and uncertainties, as well as the capital, liquidity, credit,
operational and market risks, and the critical accounting estimates,
affecting the Firm and its various lines of business, this Annual
Report should be read in its entirety.
Economic environment
The business environment in 2010 continued to improve, as signs
of growth and stability returned to both the global capital markets
and the U.S. economy. The year began with a continuation of the
trends seen at the end of 2009: although unemployment had
reached 10%, its highest level since 1983, signs were emerging
that deterioration in the labor markets was abating and economic
activity was beginning to expand. The housing sector also showed
some signs of improvement, which was helped by a new round of
home-buyer credits. Overall, during 2010, the business
environment continued to improve and the U.S. economy grew,
though the pace of growth was not sufficient to meaningfully affect
unemployment which, at year-end 2010, stood at 9.4%. Consumer
spending expanded at a moderate rate early in the year and
accelerated as the year progressed, as households continued to
reduce debt and increase savings. Businesses began to spend
aggressively, with outlays for equipment and software expanding at
a double-digit pace over the course of the year. Additionally,
businesses cautiously added to payrolls in every month of the year.
Low inflation allowed the Federal Reserve to maintain its
accommodative stance throughout 2010, in order to help promote
the U.S. economic recovery. The Federal Reserve maintained the
target range for the federal funds rate at zero to one-quarter
percent and continued to indicate that economic conditions were
likely to warrant a low federal funds rate for an extended period.
The U.S. and global economic recovery paused briefly during the
second quarter of 2010 as concerns arose that European countries
would have to take measures to address their worsening fiscal
positions. Equity markets fell sharply, and bond yields tumbled.
Concerns about the developed economies, particularly in Europe,
persisted throughout 2010 and have continued into 2011.
However, fears that the U.S. recovery was faltering proved
unfounded, and the U.S. economy continued to grow over the
second half of the year. At the same time, growth in the emerging
economies remained robust. During the fourth quarter, the Federal
Reserve announced a program to purchase longer-term Treasury
securities through 2011 in order to restrain interest rates and boost
the economy. These developments, combined with record U.S.
corporate profit margins and rapid international growth, continued
to support stock markets as financial market conditions improved
and risk spreads continued to narrow.
Financial performance of JPMorgan Chase
Year ended December 31,
(in millio
ns, except per share data
and ratios) 2010 2009 Change
Selected income stat
e
ment data
Total net revenue
$
102,694
$ 100,434 2%
Total noninterest expense
61,196
52,352 17
Pre-provision profit
41,498
48,082 (14)
Provision for credit losses
16,639
32,015 (48)
Income before extraordinary gain
17,370
11,652 49
Extraordinary gain
—
76 NM
Net income
17,370
11,728 48
Diluted earnings per share
Income before extraordinary gain
$
3.96
$ 2.24 77
Net income
3.96
2.26 75
Return on common equ
i
ty
Income before extraordinary gain
10%
6%
Net income
10
6
Capital ratios
Tier 1 capital
12.1
11.1
Tier 1 common capital
9.8
8.8
Business overview
Against the backdrop of the improvement in the business
environment during the year, JPMorgan Chase reported full-year
2010 record net income of $17.4 billion, or $3.96 per share, on net
revenue of $102.7 billion. Net income was up 48% compared with
net income of $11.7 billion, or $2.26 per share, in 2009. Return on
common equity was 10% for the year, compared with 6% for the
prior year.
The increase in net income for 2010 was driven by a lower
provision for credit losses and higher net revenue, partially offset by
higher noninterest expense. The lower provision for credit losses
reflected improvements in both the consumer and wholesale
provisions. The increase in net revenue was due predominantly to
higher securities gains in the Corporate/Private Equity segment,
increased other income and increased principal transactions
revenue, partially offset by lower credit card income. The increase in
noninterest expense was largely due to higher litigation expense.
JPMorgan Chase benefited from an improvement in the credit
environment during 2010. Compared with 2009, delinquency
trends were more favorable and estimated losses were lower in the
consumer businesses, although they remained at elevated levels.
The credit quality of the commercial and industrial loan portfolio
across the Firm’s wholesale businesses improved. In addition, for
the year, net charge-offs were lower across all businesses, though
the level of net charge-offs in the Firm’s mortgage portfolio
remained very high and continued to be a significant drag on
returns. These positive credit trends resulted in reductions in the
allowance for credit losses in Card Services, the loan portfolio in
Retail Financial Services (excluding purchased credit-impaired
loans), and in the Investment Bank and Commercial Banking.
Nevertheless, the allowance for loan losses associated with the
Washington Mutual purchased credit-impaired loan portfolio in