JP Morgan Chase 2010 Annual Report Download - page 57

JPMorgan Chase & Co./2010 Annual Report
57
Commercial Banking reported record net income, driven by a
reduction in the provision for credit losses and record net revenue.
The increase in net revenue was driven by growth in liability
balances, wider loan spreads, higher net gains from asset sales,
higher lending-related fees, an improvement in the market
conditions impacting the value of investments held at fair value,
and higher investment banking fees; these were largely offset by
spread compression on liability products and lower loan balances.
Results also included the impact of the purchase of a $3.5 billion
loan portfolio during the third quarter of 2010. The provision for
credit losses decreased from 2009 and reflected a reduction in the
allowance for credit losses, primarily due to stabilization in the
credit quality of the loan portfolio and refinements to credit loss
estimates. Noninterest expense increased slightly, reflecting higher
headcount-related expense.
Treasury and Securities Services net income decreased from
the prior year, driven by higher noninterest expense, partially offset
by a benefit from the provision for credit losses and higher net
revenue. Worldwide Securities Services net revenue was relatively
flat, as higher market levels and net inflows of assets under custody
were offset by lower spreads in securities lending, lower volatility
on foreign exchange, and lower balances on liability products.
Treasury Services net revenue was relatively flat, as lower spreads
on liability products were offset by higher trade loan and card
product volumes. Assets under custody grew to $16.1 trillion
during 2010, an 8% increase. Noninterest expense for TSS
increased, driven by continued investment in new product
platforms, primarily related to international expansion, and higher
performance-based compensation expense.
Asset Management net income increased from the prior year on
record revenue, largely offset by higher noninterest expense. The
growth in net revenue was driven by the effect of higher market
levels, net inflows to products with higher margins, higher loan
originations, higher deposit and loan balances, and higher
performance fees, partially offset by narrower deposit spreads.
Assets under supervision increased 8% during 2010 driven by the
effect of higher market valuations, record net inflows of $69 billion
to long-term products, and inflows in custody and brokerage
products, offset partially by net outflows from liquidity
products. Noninterest expense increased due to higher headcount
and performance-based compensation.
Corporate/Private Equity net income decreased from the prior
year, driven by higher noninterest expense partially offset by higher
net revenue. The increase in net revenue reflected higher securities
gains, primarily associated with actions taken to reposition the
Corporate investment securities portfolio in connection with
managing the Firm’s structural interest rate risk, and higher private
equity gains. These gains were partially offset by lower net interest
income from the investment portfolio. The increase in noninterest
expense was due to an increase in litigation reserves, including
those for mortgage-related matters, partially offset by the absence
of a $675 million FDIC special assessment in 2009.
2011 Business outlook
The following forward-looking statements are based on the current
beliefs and expectations of JPMorgan Chase’s management and are
subject to significant risks and uncertainties. As noted above, these
risks and uncertainties could cause the Firm’s actual results to differ
materially from those set forth in such forward-looking statements.
See Forward-Looking Statements on page 157 and Risk Factors on
pages 5–12 of this Annual Report.
JPMorgan Chase’s outlook for 2011 should be viewed against the
backdrop of the global and U.S. economies, financial markets
activity, the geopolitical environment, the competitive environment,
client activity levels, and regulatory and legislative developments in
the U.S. and other countries where the Firm does business. Each of
these linked factors will affect the performance of the Firm and its
lines of business. Economic and macroeconomic factors, such as
market and credit trends, customer behavior, client business
strategies and competition, are all expected to affect the Firm’s
businesses. The outlook for RFS and CS, in particular, reflects the
expected effect of current economic trends in the U.S relating to
high unemployment levels and the continuing stress and
uncertainty in the housing markets. The Firm’s wholesale
businesses will be affected by market levels and volumes, which are
volatile and quickly subject to change.
In the Mortgage Banking, Auto & Other Consumer Lending
business within RFS, management expects mortgage fees and
related income to be $1 billion or less for the first quarter of 2011,
given the levels of mortgage interest rates and production volumes
experienced year-to-date. If mortgage interest rates remain at
current levels or rise in the future, loan production and margins
could continue to be negatively affected resulting in lower revenue
for the full year 2011. In addition, revenue could continue to be
negatively affected by continued elevated levels of repurchases of
mortgages previously sold, predominantly to U.S. government-
sponsored entities (“GSEs”). Management estimates that realized
repurchase losses could total approximately $1.2 billion in 2011. In
addition, the Firm is dedicating significant resources to address,
correct and enhance its mortgage loan foreclosure procedures and
is cooperating with various state and federal investigations into its
procedures. As a result, the Firm expects to incur additional costs
and expenses in resolving these issues.
In the Real Estate Portfolios business within RFS, management
believes that, based on the current outlook for delinquencies and
loss severity, it is possible that total quarterly net charge-offs could
be approximately $1.2 billion during 2011. Given current
origination and production levels, combined with management’s
current estimate of portfolio runoff levels, the residential real estate
portfolio is expected to decline by approximately 10% to 15%
annually for the foreseeable future. The annual reductions in the
residential real estate portfolio are expected to reduce net interest
income in each period, including a reduction of approximately $700
million in 2011 from the 2010 level; however, over time the
reduction in net interest income is expected to be more than offset
by an improvement in credit costs and lower expenses. As the