JP Morgan Chase 2010 Annual Report Download - page 79

JPMorgan Chase & Co./2010 Annual Report
79
CARD SERVICES
Card Services is one of the nation’s largest credit card
issuers, with over $137 billion in loans and over 90
million open accounts. Customers used Chase cards to
meet $313 billion of their spending needs in 2010.
Chase continues to innovate, despite a very difficult
business environment, offering products and services
such as Blueprint, Chase Freedom, Ultimate Rewards,
Chase Sapphire and Ink from Chase, and earning a
market leadership position in building loyalty and
rewards programs. Through its merchant acquiring
business, Chase Paymentech Solutions, CS is a global
leader in payment processing and merchant acquiring.
Selected income statement data – managed basis(a)
Year ended December 31,
(in millions, except ratios) 2010 2009 2008
Revenue
Credit card income $ 3,513 $ 3,612 $
2,768
All other income
(b)
(236) (692) (49)
Noninterest revenue 3,277 2,920 2,719
Net interest income 13,886 17,384 13,755
Total net revenue 17,163 20,304 16,474
Provision for credit losses 8,037 18,462 10,059
Noninterest expense
Compensation expense 1,291 1,376 1,127
Noncompensation expense 4,040 3,490 3,356
Amortization of intangibles 466 515 657
Total noninterest expense 5,797 5,381 5,140
Income/(loss) before income tax
expense/(benefit) 3,329 (3,539) 1,275
Income tax expense/(benefit) 1,255 (1,314) 495
Net income/(loss) $ 2,074 $ (2,225) $
780
Memo: Net securitization income/(loss) NA $ (474) $ (183)
Financial ratios
ROE 14% (15)%
5%
Overhead ratio 34 27 31
(a) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs.
As a result of the consolidation of the securitization trusts, reported and
managed basis are equivalent for periods beginning after January 1, 2010. See
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial
Measures on pages 64–66 of this Annual Report for additional information.
Also, for further details regarding the Firm’s application and impact of the VIE
guidance, see Note 16 on pages 244–259 of this Annual Report.
(b) Includes the impact of revenue sharing agreements with other JPMorgan
Chase business segments. For periods prior to January 1, 2010, net
securitization income/(loss) is also included.
NA: Not applicable
2010 compared with 2009
Net income was $2.1 billion, compared with a net loss of $2.2 billion
in the prior year. The improved results were driven by a lower
provision for credit losses, partially offset by lower net revenue.
End-of-period loans were $137.7 billion, a decrease of $25.7
billion, or 16%, from the prior year. Average loans were
$144.4 billion, a decrease of $28.0 billion, or 16%, from the prior
year. The declines in both end-of-period and average loans were
due to a decline in lower-yielding promotional balances and the
Washington Mutual portfolio runoff.
Net revenue was $17.2 billion, a decrease of $3.1 billion, or 15%,
from the prior year. Net interest income was $13.9 billion, down by
$3.5 billion, or 20%. The decrease in net interest income was driven
by lower average loan balances, the impact of legislative changes,
and a decreased level of fees. These decreases were offset partially by
lower revenue reversals associated with lower charge-offs.
Noninterest revenue was $3.3 billion, an increase of $357 million, or
12%, driven by the prior-year write-down of securitization interests,
offset partially by lower revenue from fee-based products.
The provision for credit losses was $8.0 billion, compared with
$18.5 billion in the prior year. The current-year provision reflected
lower net charge-offs and a reduction of $6.0 billion to the
allowance for loan losses due to lower estimated losses. The prior-
year provision included an addition of $2.4 billion to the allowance
for loan losses. Including the Washington Mutual portfolio, the net
charge-off rate was 9.72%, including loans held-for-sale, up from
9.33% in the prior year; and the 30-day delinquency rate was
4.07%, down from 6.28% in the prior year. Excluding the
Washington Mutual portfolio, the net charge-off rate was 8.72%,
including loans held-for-sale, up from 8.45% in the prior year; and
the 30-day delinquency rate was 3.66%, down from 5.52% in the
prior year.
Noninterest expense was $5.8 billion, an increase of $416 million,
or 8%, due to higher marketing expense.
Credit Card Legislation
In May 2009, the CARD Act was enacted. Management estimates
that the total reduction in net income resulting from the CARD Act
is approximately $750 million annually. The run-rate impact of this
reduction in net income is reflected in results as of the end of the
fourth quarter of 2010. The full year impact on 2010 net income
was approximately $300 million.
The most significant effects of the CARD Act include: (a) the
inability to change the pricing of existing balances; (b) the
allocation of customer payments above the minimum payment to
the existing balance with the highest annual percentage rate
(“APR”); (c) the requirement that customers opt-in in order to
receive, for a fee, overlimit protection that permits an authorized
transaction over their credit limit; (d) the requirement that
statements must be mailed or delivered not later than 21 days
before the payment due date; (e) the limiting of the amount of
penalty fees that can be assessed; and (f) the requirement to review
customer accounts for potential interest rate reductions in certain
circumstances.
As a result of the CARD Act, CS has implemented certain changes
to its business practices to manage its inability to price loans to
customers at rates that are commensurate with their risk over time.
These changes include: (a) selectively increasing pricing; (b)
reducing the volume and duration of low-rate promotional pricing
offered to customers; and (c) reducing the amount of credit that is
granted to certain new and existing customers.