History [pic] JPMorgan Chase, as it exists in 2008, is the result of the combination of several large U. S. banking companies over the last decade including Chase Manhattan Bank, J. P. Morgan & Co. , Bank One, Bear Stearns and Washington Mutual. Going back further, its predecessors include major banking firms among which are Chemical Bank, Manufacturers Hanover, First Chicago Bank, National Bank of Detroit, Texas Commerce Bank, Providian Financial and Great Western Bank. (1) Chemical Banking Corporation [pic] The New York Chemical Manufacturing Company was founded in 1823 as a maker of various chemicals.
In 1824, the company amended its charter to perform banking activities and created the Chemical Bank of New York. After 1851, the bank was separated from its parent and grew organically and through a series of mergers, most notably with Corn Exchange Bank in 1954, Texas Commerce Bank (a large bank in Texas) in 1986, and Manufacturer's Hanover Trust Company in 1991 (the first major bank merger "among equals"). At many points throughout this history, Chemical Bank was the largest bank in the United States (either in terms of assets or deposit market share).
In 1996, Chemical acquired the Chase Manhattan Corporation taking the more prominent Chase name. In 2000, the combined company acquired J. P. Morgan & Co. and combined the two names to form what is today JPMorgan Chase & Co. JPMorgan Chase retains Chemical Bank's headquarters at 277 Park Avenue and stock price history. (1) Chase Manhattan Bank [pic] The Chase Manhattan Bank was formed upon the 1931 purchase of Chase National Bank (established in 1877) by the Bank of the Manhattan Company (established in 1799), the company's oldest predecessor institution.
The Bank of the Manhattan Company was the creation of Aaron Burr, who transformed The Manhattan Company from a water carrier into a bank. Led by David Rockefeller during the 1970s and the 1980s, Chase Manhattan emerged as one of the largest and most prestigious banking concerns, with leadership positions in syndicated lending, treasury and securities services, credit cards, mortgages, and retail financial services. Weakened by the real estate collapse in the early 1990s, it was acquired by Chemical Bank in 1996 but retained the Chase name.
Prior to its merger with J. P. Morgan & Co. , Chase acquired San Francisco-based Hambrecht & Quist in 1999 for $1. 35 billion. According to page 114 of An Empire of Wealth by John Steele Gordon, the origin of this strand of JPMorgan Chase's history runs as follows: “At the turn of the nineteenth century, obtaining a bank charter required an act of the state legislature. This of course injected a powerful element of politics into the process and invited what today would be called corruption but then was regarded as business as usual.
Hamilton's political enemy—and eventual murderer—Aaron Burr was able to create a bank by sneaking a clause into a charter for a company, called the Manhattan Company, to provide clean water to New York City. The innocuous-looking clause allowed the company to invest surplus capital in any lawful enterprise. Within six months of the company's creation, and long before it had laid a single section of water pipe, the company opened a bank, the Bank of the Manhattan Company. Still in existence, it is today J. P. Morgan Chase, the second largest bank in the United States. ”(1) J. P. Morgan & Company [pic]
The heritage of the House of Morgan traces its roots back to the partnership of Drexel, Morgan & Co. which in 1895, was renamed J. P. Morgan & Co. (see also: J. Pierpont Morgan). Arguably the most influential financial institutions of its era, J. P. Morgan & Co. financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world's first billion-dollar corporation. In 1895, J. P. Morgan & Co. supplied the United States government with $62 million in gold to float a bond issue and restore the treasury surplus of $100 million.
In 1892, the company began to finance the New York, New Haven and Hartford Railroad and led it through a series of acquisitions that made it the dominant railroad transporter in New England. [pic] September 16, 1920: a bomb exploded in front of the headquarters of J. P. Morgan Inc. at 23 Wall Street, injuring 400 and killing 38 people. Built in 1914, 23 Wall Street was known as the "House of Morgan," and for decades the bank's headquarters was the most important address in American finance. At noon, on September 16, 1920, a terrorist bomb exploded in front of the bank, injuring 400 and killing 38.
Shortly before the bomb went off, a warning note was placed in a mailbox at the corner of Cedar Street and Broadway. The warning read: "Remember we will not tolerate any longer. Free the political prisoners or it will be sure death for all of you. American Anarchists Fighters. " While theories abound about who was behind the Wall Street bombing and why they did it, after twenty years of investigation the FBI rendered the file inactive in 1940 without ever finding the perpetrators. In August 1914, Henry P. Davison, a Morgan partner, traveled to the UK and made a deal with the Bank of England to make J.
P. Morgan & Co. the monopoly underwriter of war bonds for UK and France. The Bank of England became a "fiscal agent" of J. P. Morgan & Co. and vice versa. The company also invested in the suppliers of war equipment to Britain and France. Thus, the company profited from the financing and purchasing activities of the two European governments. In the 1930s, all J. P. Morgan & Co. along with all integrated banking businesses in the United States, was required by the provisions of the Glass-Steagall Act to separate its investment banking from its commercial banking operations.
J. P. Morgan & Co. chose to operate as a commercial bank, because at the time commercial lending was perceived to be more profitable and prestigious business in the post depression era. Additionally, many within J. P. Morgan believed that a change in the climate would allow the company to resume its securities businesses but it would be nearly impossible to reconstitute the bank if it were disassembled. In 1935, after being barred from securities business for over a year, the heads of J. P. Morgan made the decision to spinoff its investment banking operations. Led by J. P.
Morgan partners, Henry S. Morgan (son of Jack Morgan and grandson of J. Pierpont Morgan) and Harold Stanley, Morgan Stanley was founded on September 16, 1935 with $6. 6 million of nonvoting preferred stock from J. P. Morgan partners. In order to bolster its position, in 1959, J. P. Morgan merged with the Guaranty Trust Company of New York to form the Morgan Guaranty Trust Company. The bank would continue to operate as Morgan Guaranty through the 1980s before beginning to migrate back toward the use of the J. P. Morgan brand. In 1988, the company once again began operating exclusively as J.
P. Morgan & Co. (1) Bank One Corporation [pic] In 2004, JPMorgan Chase merged with Bank One Corp. , bringing on board current chairman and CEO Jamie Dimon as president and COO and designating him as CEO William B. Harrison, Jr. 's successor. Dimon's pay was pegged at 90% of Harrison's. Dimon quickly made his influence felt by embarking on a cost-cutting strategy and replaced former JPMorgan Chase executives in key positions with Bank One executives—many of whom were with Dimon at Citigroup. Dimon became CEO in January 2006 and Chairman in December 2006.
Bank One Corporation was formed upon the 1998 merger between Banc One of Ohio and First Chicago NBD. These two large banking companies had themselves been created through the merger of many banks. This merger was largely considered a failure until Jamie Dimon—recently ousted as President of Citigroup—took over and reformed the new firm's practices—especially its disastrous technology mishmash inherited from the many mergers prior to this one. Mr. Dimon effected more than sufficient changes to make Bank One Corporation a viable merger partner for JPMorgan Chase.
Bank One Corporation traced its roots to First Bancgroup of Ohio, founded as a holding company for City National Bank of Columbus, Ohio and several other banks in that state, all of which were renamed "Bank One" when the holding company was renamed Bank One Corporation. With the beginning of interstate banking they spread into other states, always renaming acquired banks "Bank One", though for a long time they resisted combining them into one bank. After the NBD merger, adverse financial results led to the departure of CIO John B.
McCoy, whose father and grandfather had headed Banc One and predecessors. Jamie Dimon, a former key executive of Citigroup, was brought in to head the company. JPMorgan Chase completed the acquisition of Bank One in 2004. (1) Bear Stearns [pic] At the end of 2007, Bear Stearns was the fifth largest investment bank in the United States but its market capitalization had deteriorated through the second half of 2007. On Friday, March 14, 2008 Bear Stearns & Co. Inc. lost 47% of its market value to close at $30. 00 per share as rumors emerged that clients were withdrawing capital from the bank.
Over the following weekend it emerged that Bear Stearns might prove insolvent and on or around March 15, 2008 the Federal Reserve engineered a deal to prevent a wider systemic crisis from the collapse of Bear Stearns. On March 16, 2008, JPMorgan Chase announced that it had plans to acquire Bear Stearns & Co. Inc. in a stock swap worth $2. 00 per share or $240 million pending mutual shareholder approval scheduled within 90 days. Until then, JPMorgan Chase has agreed to guarantee all Bear Stearns trades and business process flows. [9] Two days later, on March 18, 2008, JPMorgan Chase announced the acquisition of Bear Stearns for $236 million.
The stock swap agreement was completed in the late night hours of March 18, 2008, with JPMorgan exchanging 0. 05473 of each of its shares for one Bear share, which were valued at $2 each. [10] On March 24, 2008, a revised offer was announced at approximately $10 per share. Under the revised terms, JPMorgan immediately acquired a 39. 5% stake in Bear Stearns (using newly issued shares) at the new offer price and gained a commitment from the board (representing another 10% of the share capital) that its members would vote in favour of the new deal.
The merger was completed by June 2, 2008 and Bear Stearns is currently part of JPMorgan Chase. (1) Washington Mutual [pic] On September 25, 2008; JPMorgan Chase bought most of the banking operations of Washington Mutual from the receivership of the FDIC. That night, the Office of Thrift Supervision had seized Washington Mutual Bank and placed it into receivership in by far the largest bank failure in American history. The FDIC sold the bank's assets, secured debt obligations and deposits to JPMorgan Chase & Co for $1. 836 billion, which re-opened the bank the following day. As a result of the takeover, Washington Mutual shareholders ost all their equity. JPMorgan Chase raised $10 billion in a stock sale to cover writedowns and losses after taking on deposits and branches of Washington Mutual. Through the acquisition, JPMorgan Chase now owns the former accounts of Providian Financial, a credit card issuer WaMu acquired in 2005. The company announced plans to complete the rebranding of Washington Mutual branches to Chase by late 2009. (1) Collegiate Funding Services In 2006, JPMorgan Chase purchased Collegiate Funding Services, a portfolio company of private equity firm Lightyear Capital, for $663 million.
CFS was used as the foundation for the Chase Student Loans, previously known as Chase Education Finance. (1) Other recent acquisitions On April 7, 2006, JPMorgan Chase announced it would be swapping its corporate trust unit for The Bank of New York Co. 's retail and small business banking network. The swap valued The Bank of New York business at $3. 1 billion and JPMorgan's trust unit at $2. 8 billion and gives Chase access to 338 additional branches and 700,000 new customers in the New York, New Jersey, and Indiana operations On March 26, 2008, JPMorgan acquired the UK-based carbon offsetting company ClimateCare. (1) Banking subsidiaries
JPMorgan Chase & Co. owns five bank subsidiaries in the United States: • Chase Bank USA, National Association • JPMorgan Chase Bank, National Association • JPMorgan Chase Bank, Dearborn • J. P. Morgan Trust Company, National Association • Custodial Trust Company (1,2) Home Foreclosures Continue in 2009 The US Treasury Department transferred $25 billion of US funds to JPMorgan Chase on Oct 28 via TARP. [23]. This was the fifth largest amount transferred under TARP[24]. One of the main purposes of TARP is to help troubled assets related to residential mortgages and all obligations as such as specifically detailed in TARP.
In January 2009, JPMorgan Chase announced its intent to change the terms of upwards of a trillion dollars-worth of mortgages in an effort to keep them from foreclosure. [25] Jamie Dimon, JPMorgan chief executive, criticized a proposed law that would allow bankruptcy judges to cut the mortgage rates in existing mortgages for borrowers who would otherwise be forced into default. [25] Despite its annoucement, JPMorgan Chase has continued to process foreclosures on hundreds of thousands of properties. (1,2) Performance of JP Morgan Chase and Co. over the Last Year (2008) JPMorgan Chase Reports Full-Year 2008 Net Income of $5. 6 Billion, or $1. 7 per Share, on Revenue of $67. 3 Billion; Fourth-Quarter 2008 Net Income of $702 Million, or $0. 07 per Share Reported the following significant items in the fourth-quarter: • $4. 1 billion (pretax) increase to loan loss reserves, resulting in coverage ratios of 4. 24%1 for consumer businesses and 2. 64% for wholesale businesses • $2. 9 billion (pretax) net markdowns due to leveraged lending exposures and mortgage-related positions in the Investment Bank • $1. 1 billion (after tax) benefit from merger-related items • $854 million (after tax) benefit from MSR risk management results • $680 million (after tax) private equity write-downs $627 million (after tax) gain due to dissolution of Paymentech joint venture (2,3,4) • Maintained strong balance sheet, with Tier 1 capital of $136. 2 billion, or 10. 8% (estimated), at year-end • Grew the franchise in 2008, as demonstrated by the following accomplishments 2: • More than one million new checking accounts opened in Retail Financial Services • Double-digit growth in loans and liability balances in Commercial Banking and in liability balances in Treasury & Securities Services • #1 rankings for Global Investment Banking Fees and Global Debt, Equity & Equity-related volumes for the fourth quarter and full-year 2008 (2,3,4) Continued to focus on safe and sound lending activities, and launched significant enhancements to mortgage modification programs: • Extended more than $100 billion in new credit during the fourth quarter alone to consumers, corporations, small businesses, municipalities, and non-profits (including more than five million card, home equity, mortgage, auto and education loans) • Announced plan to help 400,000 U. S. homeowners avoid foreclosure over the next two years through loan modifications (2,3,4) INVESTMENT BANK (IB) [pic] Discussion of Results: Net loss was $2. 4 billion, a decrease of $2. billion from the prior year. The weaker results reflected a decrease in net revenue and a higher provision for credit losses, partially offset by lower noninterest expense. Net revenue was negative $302 million, a decrease of $3. 5 billion from the prior year. Investment banking fees were $1. 4 billion, down 17% from the prior year. Advisory fees were $579 million, down 10% from the prior year, reflecting decreased levels of activity, partially offset by improved market share. Debt underwriting fees were $464 million, down 1% from the prior year. Equity underwriting fees were $330 million, down 39% from the prior year.
Fixed Income Markets revenue was negative $1. 7 billion, compared with $615 million in the prior year. The decrease was driven by $1. 8 billion of net markdowns on leveraged lending funded and unfunded commitments; $1. 1 billion of net markdowns on mortgage-related exposures; weak trading results in credit-related products; and losses of $367 million from the tightening of the firm's credit spread on certain structured liabilities. These results were largely offset by record performance in rates and currencies and strong performance in commodities and emerging markets.
Equity Markets revenue was negative $94 million, down by $672 million from the prior year, reflecting weak trading results and losses of $354 million from the tightening of the firm's credit spread on certain structured liabilities, partially offset by strong client revenue across products, including prime services. Credit Portfolio revenue was $90 million, down $232 million from the prior year. The provision for credit losses was $765 million, compared with $200 million in the prior year, predominantly reflecting a higher allowance driven by a weakening credit environment.
Net charge-offs were $87 million, compared with net recoveries of $9 million in the prior year. The allowance for loan losses to average loans retained was 4. 71% for the current quarter, an increase from 1. 93% in the prior year. Average loans retained were $73. 1 billion, an increase of $4. 2 billion, or 6%, from the prior year. Average fair-value and held-for-sale loans were $16. 4 billion, down $8. 6 billion, or 34%, from the prior year. Noninterest expense was $2. 7 billion, down 9% from the prior year, reflecting lower performance-based compensation expense, largely offset by additional expenses relating to the Bear Stearns merger.
Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • Ranked #1 in Global Debt, Equity and Equity-related; #1 in Global Equity and Equity-related; #2 in Global Long-Term Debt; #1 in Global Syndicated Loans; and #2 in Global Announced M&A, based on volume, for the year ended December 31, 2008, according to Thomson Reuters. • Ranked #1 in Global Investment Banking Fees for the year ended December 31, 2008, according to Dealogic. • Return on Equity was negative 28% on $33. 0 billion of average allocated capital. (3,4) RETAIL FINANCIAL SERVICES (RFS) [pic]
Discussion of Results: Net income was $624 million, a decrease of $107 million, or 15%, from the prior year, as a significant increase in the provision for credit losses was predominantly offset by positive MSR risk management results and the positive impact of the Washington Mutual transaction. Net revenue was $8. 7 billion, an increase of $3. 9 billion, or 81%, from the prior year. Net interest income was $4. 7 billion, up $2. 0 billion, or 75%, benefiting from the Washington Mutual transaction, wider deposit and loan spreads, and higher loan and deposit balances. Noninterest revenue was $4. billion, up $1. 9 billion, or 88%, as positive MSR risk management results and the impact of the Washington Mutual transaction were offset partially by a decline in mortgage production revenue. The provision for credit losses was $3. 6 billion, an increase of $2. 5 billion from the prior year, as housing price declines continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. The provision includes $1. 6 billion in addition to the allowance for loan losses for the heritage Chase home equity and mortgage portfolios.
Home equity net charge-offs were $770 million (2. 15% net charge-off rate; 2. 67% excluding purchased credit impaired loans), compared with $248 million (1. 05% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $319 million (5. 64% net charge-off rate; 8. 08% excluding purchased credit impaired loans), compared with $71 million (2. 08% net charge-off rate) in the prior year. Prime mortgage net charge-offs were $195 million (0. 89% net charge-off rate; 1. 20% excluding purchased credit impaired loans), compared with $17 million (0. 22% net charge-off rate) in the prior year.
The provision for credit losses was also affected by an increase in estimated losses for the auto and business banking loan portfolios. Noninterest expense was $4. 0 billion, an increase of $1. 5 billion, or 59%, from the prior year, reflecting the impact of the Washington Mutual transaction, higher mortgage reinsurance losses, and increased servicing expense. Retail Banking, which includes the results of all consumer banking and business banking activities, reported net income of $1. 0 billion, up $479 million, or 85%, from the prior year. Net revenue was $4. 5 billion, up $2. billion, or 78%, reflecting the impact of the Washington Mutual transaction, wider deposit spreads, higher deposit-related fees, and higher deposit balances. The provision for credit losses was $268 million, compared with $50 million in the prior year, reflecting an increase in the allowance for loan losses for Business Banking loans due to higher estimated losses on the portfolio. Noninterest expense was $2. 5 billion, up $965 million, or 62%, from the prior year, due to the Washington Mutual transaction. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) Checking accounts totaled 24. 5 million, including 12. 6 million attributable to the Washington Mutual transaction, an increase of 13. 7 million, or 126%. • Average total deposits grew to $339. 8 billion, including $126. 3 billion attributable to the Washington Mutual transaction, an increase of $131. 4 billion, or 63%. • Deposit margin increased to 2. 94% from 2. 67%. • Average business banking loans were $18. 2 billion and originations were $0. 8 billion. • Number of branches grew to 5,474, including 2,237 attributable to the Washington Mutual transaction, up 2,322 overall. Branch sales of credit cards increased by 56%. • Branch sales of investment products decreased by 4%. • Overhead ratio (excluding amortization of core deposit intangibles) decreased to 54% from 57%. (3,4) Consumer Lending, which includes the results of all consumer loan origination, servicing, and portfolio management activities, reported a net loss of $416 million, compared with net income of $170 million in the prior year. Net revenue was $4. 2 billion, up $1. 9 billion, or 85%, driven by higher mortgage fees and related income, the impact of the Washington Mutual transaction, wider loan spreads and higher loan balances.
The increase in mortgage fees and related income was driven by higher net mortgage servicing revenue, partially offset by lower mortgage production revenue. Mortgage production revenue of $62 million was down $103 million, reflecting markdowns of the mortgage warehouse and an increase in reserves related to the repurchase of previously-sold loans. Net mortgage servicing revenue (which includes loan servicing revenue, MSR risk management results and other changes in fair value) was $1. 9 billion, an increase of $1. 2 billion, or 163%, from the prior year. Loan servicing revenue was $1. billion, an increase of $741 million on growth of 91% in third-party loans serviced. MSR risk management results were positive $1. 4 billion, compared with positive $491 million in the prior year. Other changes in fair value of the MSR asset were negative $843 million, compared with negative $393 million in the prior year. The provision for credit losses was $3. 3 billion, compared with $1. 0 billion in the prior year. The provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial Services discussion of the provision for credit losses above for further detail). Noninterest expense was $1. billion, up $540 million, or 55%, from the prior year, reflecting the impact of the Washington Mutual transaction, higher mortgage reinsurance losses and higher servicing expense due to increased delinquencies and defaults. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • Average mortgage loans were $150. 0 billion, up $105. 5 billion, or 237%, due to the Washington Mutual transaction. Mortgage loan originations were $28. 1 billion, down 30% from the prior year and down 25% from the prior quarter. • Total third-party mortgage loans serviced were $1. trillion, an increase of $557. 9 billion, or 91%, predominantly due to the Washington Mutual transaction. • Average home equity loans were $142. 8 billion, up $48. 8 billion, or 52%, due to the Washington Mutual transaction. Home equity originations were $1. 7 billion, down $8. 1 billion, or 83%. • Average auto loans were $42. 9 billion, up 3%. Auto loan originations were $2. 8 billion, down 50%, reflecting industry-wide weakness in auto sales. (3,4) CARD SERVICES (CS)(a) [pic] Discussion of Results: Net loss was $371 million, a decline of $980 million from the prior year.
The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue. End-of-period managed loans were $190. 3 billion, an increase of $33. 3 billion, or 21%, from the prior year and up $3. 8 billion, or 2%, from the prior quarter. Average managed loans were $187. 3 billion, an increase of $35. 6 billion, or 23%, from the prior year and up $29. 7 billion, or 19%, from the prior quarter. The increase from the prior year in both end-of-period and average managed loans was predominantly due to the impact of the Washington Mutual transaction.
Excluding Washington Mutual, end-of-period and average managed loans were $162. 1 billion and $159. 6 billion, respectively. Managed net revenue was $4. 9 billion, an increase of $937 million, or 24%, from the prior year. Net interest income was $4. 3 billion, up $1. 2 billion, or 38%, from the prior year, driven by the impact of the Washington Mutual transaction, higher average managed loan balances, and wider loan spreads. These benefits were offset partially by the effect of higher revenue reversals associated with higher charge-offs.
Noninterest revenue was $590 million, a decrease of $244 million, or 29%, from the prior year, driven by lower securitization income as well as increased rewards expense and higher volume-driven payments to partners, partially offset by the impact of the Washington Mutual transaction. The managed provision for credit losses was $4. 0 billion, an increase of $2. 2 billion, or 122%, from the prior year, due to an increase of $1. 1 billion in the allowance for loan losses and a higher level of charge-offs. The managed net charge-off rate for the quarter was 5. 56%, up from 3. 89% in the prior year and 5. 00% in the prior quarter.
The 30-day managed delinquency rate was 4. 97%, up from 3. 48% in the prior year and 3. 91% in the prior quarter. Excluding Washington Mutual, the managed net charge-off rate for the fourth quarter was 5. 29% and the 30-day delinquency rate was 4. 36%. Noninterest expense was $1. 5 billion, an increase of $266 million, or 22%, from the prior year, due to the impact of the Washington Mutual transaction. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • Return on equity was negative 10%, down from positive 17% in the prior year. • Pretax income to average managed loans (ROO) was negative 1. 6%, compared with positive 2. 51% in the prior year and positive 1. 17% in the prior quarter. • Net interest income as a percentage of average managed loans was 9. 17%, up from 8. 20% in the prior year and 8. 18% in the prior quarter. Excluding Washington Mutual, the ratio was 8. 18%. • Net accounts of 4. 3 million were opened during the quarter. Excluding Washington Mutual, net accounts opened were 3. 8 million. • Charge volume was $96. 0 billion, an increase of $0. 5 billion, or 1%, from the prior year. Excluding Washington Mutual, charge volume was $88. 2 billion. • Merchant processing volume was $135. billion and total transactions were 4. 9 billion. • The termination of Chase Paymentech Solutions, a global payments and merchant-acquiring joint venture between JPMorgan Chase and First Data Corporation, was completed on November 1, 2008. JPMorgan Chase retained approximately 51% of the business under the Chase Paymentech name. (3,4) COMMERCIAL BANKING (CB) [pic] Discussion of Results: Net income was a record $480 million, an increase of $192 million, or 67%, from the prior year, driven by higher net revenue including the impact of the Washington Mutual transaction, offset partially by higher provision for credit losses.
Net revenue was $1. 5 billion, an increase of $395 million, or 36%, from the prior year. Net interest income was $1. 1 billion, up $345 million, or 46%, from the prior year, driven by the Washington Mutual transaction, double-digit growth in liability and loan balances, and a shift to higher spread liability products, partially offset by spread compression in the liability and loan portfolios. Noninterest revenue was $376 million, an increase of $50 million, or 15%, from the prior year, reflecting higher deposit and lending-related fees, partially offset by lower other income.
Revenue from Middle Market Banking was $796 million, an increase of $101 million, or 15%, from the prior year. Revenue from Commercial Term Lending, a new client segment encompassing multi-family and commercial mortgage loans, was $243 million. Revenue from Mid-Corporate Banking was $243 million, an increase of $4 million, or 2%. Revenue from Real Estate Banking was $131 million, an increase of $29 million, or 28%, due to the impact of the Washington Mutual transaction. The provision for credit losses was $190 million, an increase of $85 million, or 81%, compared with the prior year.
The current-quarter provision reflects a weakening credit environment. The allowance for loan losses to average loans retained was 2. 41% for the current quarter, down from 2. 66% in the prior year and up from 2. 32% in the prior quarter, reflecting the changed mix of the loan portfolio as a result of the Washington Mutual transaction. Nonperforming loans were $1. 0 billion, up $880 million from the prior year and up $182 million from the prior quarter, reflecting the impact of the Washington Mutual transaction and the effect across all business segments of a weakening credit environment.
Net charge-offs were $118 million (0. 40% net charge-off rate), compared with $33 million (0. 21% net charge-off rate) in the prior year and $40 million (0. 22% net charge-off rate) in the prior quarter. Noninterest expense was $499 million, a decrease of $5 million, or 1%, from the prior year, due to lower performance-based compensation expense, largely offset by the impact of the Washington Mutual transaction. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • Overhead ratio was 34%, an improvement from 46%. Gross investment banking revenue (which is shared with the Investment Bank) was $241 million. • Average loan balances were $117. 7 billion, up $52. 1 billion, or 80%, from the prior year and up $45. 4 billion, or 63%, from the prior quarter. • Average liability balances were $114. 1 billion, up $17. 4 billion, or 18%, from the prior year and up $14. 7 billion, or 15%, from the prior quarter. (3,4) TREASURY & SECURITIES SERVICES (TSS) [pic] Discussion of Results: Net income was a record $533 million, an increase of $111 million, or 26%, from the prior year, driven by higher net revenue, partially offset by higher noninterest expense.
Net revenue was a record $2. 2 billion, an increase of $319 million, or 17%, from the prior year. Worldwide Securities Services net revenue was a record $1. 3 billion, an increase of $150 million, or 14%, from the prior year. The growth was driven by higher liability balances, reflecting increased client deposit activity resulting from recent market conditions, and wider spreads in foreign exchange. These benefits were offset partially by the effects of market depreciation and lower securities lending balances. Treasury Services net revenue was a record $1. billion, an increase of $169 million, or 21%, reflecting higher liability balances and higher trade revenue. Liability balance revenue growth reflects increased client deposit activity, resulting from recent market conditions and organic growth, partially offset by spread compression. Trade revenue benefited from higher volumes and wider loan spreads. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $3. 1 billion, an increase of $454 million, or 17%. Treasury Services firmwide net revenue grew to $1. 8 billion, an increase of $304 million, or 20%.
The provision for credit losses was $45 million, an increase of $41 million from prior year, reflecting a weakening credit environment. Noninterest expense was $1. 3 billion, an increase of $117 million, or 10%, from the prior year, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • TSS pretax margin(2) was 37%, up from 29% in the prior quarter and 35% in the prior year. • Average liability balances were $336. 3 billion, up 34%. Assets under custody were $13. 2 trillion, down 17%. • Key new client relationships/services added in the fourth quarter: • Chosen by ICE Clear Europe to provide a comprehensive solution combining multi-currency payments, cash investment and global custody capabilities; ICE Clear Europe provides clearing services for all ICE Futures Europe contracts and all cleared OTC contracts transacted in ICE's global OTC markets. • Appointed by Roche Holding Ltd as the successor depositary bank for Roche's ADR program, one of the top-10 ADR programs in Europe and among the most actively traded. Expanded relationship with the U. S. Postal Service to include cash and check depository processing services. • Selected by Augustus Asset Managers Limited to provide Fund Administration and Middle Office services to the majority of its managed hedge funds. (3,4) ASSET MANAGEMENT (AM) [pic] Discussion of Results: Net income was $255 million, a decline of $272 million, or 52%, from the prior year, due to lower net revenue offset partially by lower noninterest expense. Net revenue was $1. 7 billion, a decrease of $731 million, or 31%, from the prior year. Noninterest revenue was $1. billion, a decline of $868 million, or 42%, due to the effect of lower markets, including the impact of lower market valuations of seed capital investments and lower performance fees; these effects were offset partially by the benefit of the Bear Stearns merger. Net interest income was $466 million, up $137 million, or 42%, from the prior year, predominantly due to wider deposit spreads and higher deposit and loan balances. Private Bank revenue declined 3% to $630 million, as the effects of lower markets and lower performance fees were predominantly offset by increased deposit and loan balances.
Private Wealth Management revenue declined 4% to $330 million due to lower assets under management. Institutional revenue declined 57% to $327 million due to lower performance fees and lower market valuations of principal investments, partially offset by net liquidity inflows. Retail revenue decreased by 59% to $265 million due to the effect of lower markets, including the impact of lower market valuations of seed capital investments and net equity outflows. Bear Stearns Brokerage contributed $106 million to revenue. Assets under supervision were $1. trillion, a decrease of $76 billion, or 5%, from the prior year. Assets under management were $1. 1 trillion, down $60 billion, or 5%, from the prior year. The decrease was due to the effect of lower markets and non-liquidity outflows, predominantly offset by liquidity product inflows across all segments and the addition of Bear Stearns assets under management. Custody, brokerage, administration and deposit balances were $363 billion, down $16 billion due to the effect of lower markets on brokerage and custody balances, offset by the addition of Bear Stearns Brokerage.
The provision for credit losses was $32 million, compared with negative $1 million in the prior year, reflecting a weakening credit environment. Noninterest expense of $1. 2 billion decreased $346 million, or 22%, from the prior year due to lower performance-based compensation, partially offset by the effect of the Bear Stearns merger. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • Pretax margin(2) was 25%, down from 35%. • Assets under management were $1. 1 trillion, down $60 billion, or 5%, included: Growth of $213 billion, or 53%, in liquidity products; and • The addition of $15 billion from the Bear Stearns merger. • Assets under management net inflows were $61 billion for the fourth quarter of 2008. Net inflows were $151 billion for the 12-month period ended December 31, 2008. • Assets under management ranked in the top two quartiles for investment performance were 76% over five years, 65% over three years and 54% over one year. • Customer assets in 4 and 5 Star-rated funds were 42%. • Average loans of $36. billion were up $4. 2 billion, or 13%. • Average deposits of $76. 9 billion were up $12. 3 billion, or 19%. (3,4) CORPORATE/PRIVATE EQUITY [pic] Discussion of Results: Net income for Corporate/Private Equity was $1. 5 billion, compared with net income of $270 million in the prior year. This segment includes the results of Private Equity and Corporate business segments, as well as merger-related items. Net loss for Private Equity was $682 million, compared with net income of $356 million in the prior year. Net revenue was negative $1. billion, a decrease of $1. 8 billion, reflecting Private Equity write-downs of $1. 1 billion, compared with gains of $712 million in the prior year. Noninterest expense was negative $40 million, a decrease of $173 million from the prior year, reflecting lower compensation expense. Net income for Corporate was $1. 2 billion, compared with a net loss of $72 million in the prior year, and included an after-tax gain of $627 million on the dissolution of the Chase Paymentech joint venture. Net after-tax merger-related items included a $1. billion extraordinary gain, net costs of $60 million related to the Washington Mutual transaction, and net costs of $201 million related to the Bear Stearns merger. Key Metrics and Business Updates: (All comparisons to the prior-year quarter except as noted) • The Private Equity portfolio totaled $6. 9 billion, compared with $7. 2 billion in the prior year and $7. 5 billion in the prior quarter. The portfolio represented 5. 8% of total stockholders' equity less goodwill, down from 9. 2% in the prior year and 7. 5% in the prior quarter. (3,4) JPMORGAN CHASE (JPM) [pic]
Discussion of Results: Net income was $702 million, a decrease of $2. 3 billion, or 76%, from the prior year. The decline in earnings was driven by a higher provision for credit losses and increased noninterest expense. Managed net revenue was $19. 1 billion, an increase of $833 million, or 5%, from the prior year. Noninterest revenue was $3. 2 billion, down $6. 2 billion, or 66%, due to lower principal transactions revenue, which reflected net markdowns on leveraged lending funded and unfunded commitments and mortgage-related exposures, and Private Equity write-downs.
Partially offsetting these declines were the gain on the dissolution of the Chase Paymentech joint venture and positive MSR risk management results. Net interest income was $15. 9 billion, up $7. 1 billion, or 80%, due to the impact of the Washington Mutual transaction, higher trading-related net interest income, higher liability and loan balances, and wider loan and deposit spreads. The managed provision for credit losses was $8. 5 billion, up $5. 4 billion, or 170%, from the prior year. The total consumer-managed provision for credit losses was $7. 4 billion, compared with $2. billion in the prior year, reflecting increases in the allowance for credit losses related to home equity, mortgage and credit card loans, as well as higher net charge-offs. Consumer-managed net charge-offs were $4. 3 billion, compared with $2. 0 billion in the prior year, resulting in managed net charge-off rates of 3. 61% and 2. 22%, respectively. The wholesale provision for credit losses was $1. 1 billion, compared with $308 million in the prior year, due to an increase in the allowance for credit losses reflecting the effect of a weakening credit environment.
Wholesale net charge-offs were $217 million, compared with net charge-offs of $25 million, resulting in net charge-off rates of 0. 33% and 0. 05%, respectively. The firm had total nonperforming assets of $12. 7 billion at December 31, 2008, up from the prior-year level of $3. 9 billion. Noninterest expense was $11. 3 billion, up $535 million, or 5%, from the prior year. The increase was driven by the impact of the Washington Mutual transaction and additional operating costs relating to the Bear Stearns merger, partially offset by lower compensation expense. Key Metrics and Business Updates: All comparisons to the prior-year quarter except as noted) • Tier 1 capital ratio was 10. 8% at December 31, 2008 (estimated), 8. 9% at September 30, 2008, and 8. 4% at December 31, 2007. • Headcount was 224,961 at December 31, 2008, which includes 41,398 from the acquisition of Washington Mutual's banking operations. The remaining 183,563 which includes headcount from the Bear Stearns merger, reflects an increase of 2,896 from December 31, 2007. (3,4) JPMORGAN CHASE & CO. CONSOLIDATED FINANCIAL HIGHLIGHTS (in millions, except per share, ratio and headcount data)
QUARTERLY TRENDS FULL YEAR ------------------------------------------------------------------- ----------------------------------------- 2008 4Q08 Change Change --------------- -------- 4Q08 3Q08 4Q07 3Q08 4Q07 2008 2007 2007 ----------- ----------- ---------- ----- ---- ----------- ---------- -------- SELECTED INCOME STATEMENT DATA ---------------------
Total net revenue $ 17,226 $ 14,737 $ 17,384 17 % (1) % $ 67,252 $ 71,372 (6) % Provision for credit losses (a) 7,313 5,787 2,542 26 188 20,979 6,864 206 Total noninterest expense 11,255 11,137 10,720 1 5 43,500 41,703 4 Income (loss) before extraordinary gain (623) (54) 2,971 NM NM 3,699 15,365 (76) Extraordinary gain b) 1,325 581 - 128 NM 1,906 - NM Net income 702 527 2,971 33 (76) 5,605 15,365 (64) PER COMMON SHARE: --------------------- Basic Earnings Income (loss) before extraordinary gain (0. 28) (0. 06) 0. 88 (367) NM 0. 86 4. 51 (81) Net income 0. 07 0. 11 0. 88 (36) (92) 1. 41 4. 1 (69) Diluted Earnings Income (loss) before extraordinary gain (0. 28) (0. 06) 0. 86 (367) NM 0. 84 4. 38 (81) Net income 0. 07 0. 11 0. 86 (36) (92) 1. 37 4. 38 (69) Cash dividends declared 0. 38 0. 38 0. 38 - - 1. 52 1. 48 3 Book value 36. 15 36. 95 36. 59 (2) (1) 36. 5 36. 59 (1) Closing share price 31. 53 46. 70 43. 65 (32) (28) 31. 53 43. 65 (28) Market capitalization 117,695 174,048 146,986 (32) (20) 117,695 146,986 (20) COMMON SHARES OUTSTANDING: --------------------- Weighted-average diluted shares outstanding 3,737. 5 (h) 3,444. 6 (h) 3,471. 8 9 8 3,604. 9 3,507. 6 3 Common shares outstanding at period-end (c) 3,732. 3,726. 9 3,367. 4 - 11 3,732. 8 3,367. 4 11 FINANCIAL RATIOS: (d) --------------------- Income (loss) before extraordinary gain: Return on common equity ("ROE") (3) % (1) % 10% 2 % 13% Return on equity-goodwill ("ROE-GW") (e) (5) (1) 15 4 21 Return on assets ("ROA") (0. 11) (0. 01) 0. 77 0. 1 1. 06 Net income: ROE 1 1 10 4 13 ROE-GW (e) 1 2 15 6 21 ROA 0. 13 0. 12 0. 77 0. 31 1. 06 CAPITAL RATIOS: --------------------- Tier 1 capital ratio 10. 8 (i) 8. 9 8. 4 Total capital ratio 14. 7 (i) 12. 6 12. 6 SELECTED BALANCE
SHEET DATA (Period-end) --------------------- Total assets $2,175,052 $2,251,469 $1,562,147 (3) 39 $2,175,052 $1,562,147 39 Wholesale loans 262,044 288,445 213,076 (9) 23 262,044 213,076 23 Consumer loans 482,854 472,936 306,298 2 58 482,854 306,298 58 Deposits 1,009,277 969,783 740,728 4 36 1,009,277 740,728 36 Common stockholders' quity 134,945 137,691 123,221 (2) 10 134,945 123,221 10 Headcount (f) 224,961 228,452 180,667 (2) 25 224,961 180,667 25 LINE OF BUSINESS NET INCOME (LOSS) --------------------- Investment Bank $ (2,364) $ 882 $ 124 NM NM $ (1,175) $ 3,139 NM Retail Financial
Services 624 64 731 NM (15) 880 2,925 (70) Card Services (371) 292 609 NM NM 780 2,919 (73) Commercial Banking 480 312 288 54 67 1,439 1,134 27 Treasury &
Securities Services 533 406 422 31 26 1,767 1,397 26 Asset Management 255 351 527 (27) (52) 1,357 1,966 (31) Corporate/Private
Equity (g) 1,545 (1,780) 270 NM 472 557 1,885 (70) --------- --------- --------- --------- --------- Net income $ 702 $ 527 $ 2,971 33 (76) $ 5,605 $ 15,365 (64) ========= (2,3,4) How has the Recession affected JPMorgan Chase and Co.? JPMorgan Chase reported a $702 million profit for its fourth quarter Thursday, topping forecasts for a quarter expected to be among the toughest in its history.
The bank posted more than $2. 8 billion in losses on a range of business, from trading and corporate lending to credit card and mortgage lending as it confronted the worst housing and job markets in decades. Its investment bank was battered by the sharp downturn in the market and rising losses as it struggled to wind down a big securities portfolio. (2,5) James Dimon, JPMorgan's chief executive and the recipient of lavish praise for preparing his company for the crisis, conceded the quarter was rough. Our fourth-quarter financial results were very disappointing," Dimon said in a statement. (2,5) The company's profit, which amounts to 7 cents a share, falls far short of the nearly $3 billion, or 86 cents a share, it earned in the period last year. But analysts estimated on average that the company would break even on a per-share basis, according to a survey by Bloomberg News. Revenue slipped to $17. 2 billion from $17. 4 billion. The report sent JPMorgan's shares higher in early trading Thursday. Minutes after the market opened, the shares were up 2. percent, or 64 cents, at $26. 55. (2,5) JPMorgan, which moved its earnings announcement up one week, is the first big bank to release its results for a fourth quarter likely to be steeped in losses. And yet it is considered by many analysts and industry insiders to be better positioned than its rivals. For all of 2008, net profit was $5. 6 billion, or $1. 37 a share, down 64 percent from $15. 4 billion, or $4. 38 in 2007. Revenue for the year dropped about 6 percent, to $67. 2 billion from $71. 4 billion. (2,5)
Citigroup, which moved up its earnings report to Friday, has begun the spin-off of its prized brokerage business to offset billions of dollars in probable losses for its own fourth quarter - and it may still need a third government lifeline. Bank of America, which reports its results Tuesday, is seeking billions of dollars in additional government aid to comfortably absorb Merrill Lynch. Shares in JPMorgan have fallen 37 percent over the past 12 months. But they have held up far better than those in Citigroup and Bank of America, whose stocks have fallen by at least twice as much.
Still, Dimon offered more gloom to come that if the economic environment deteriorates further, which is a distinct possibility, it is reasonable to expect additional negative impact on our market-related businesses, continued higher loan losses and increases to our credit reserves. (2,5) For JPMorgan, the quarter also showed the challenges of orchestrating two tough mergers at once. Dimon has taken advantage of the credit crisis to expand JPMorgan's businesses, snapping up Bear Stearns and Washington Mutual as they collapsed.
Most of JPMorgan's pain was still concentrated in its corporate businesses, including investment banking and commercial lending, as the company grappled with its mortgage trading book and loans made for private equity deals. It wrote down $1. 1 billion in charges on its mortgage exposures and a hefty $1. 8 billion on so-called leveraged loans, which have been difficult for lenders to resell. And with Washington Mutual, it is bracing for more losses tied to commercial real estate. Consumer-lending businesses led to a $416 million loss, as the company took a $3. billion provision for potential losses in mortgage lending. The bank has also exercised caution as it heads into a recession. One belated step that JPMorgan took this week to curtail exposure to troublesome consumer debt was the bank's announcement that it would stop lending through independent mortgage brokers. Instead, it will extend loans through its own branches, following Bank of America and other rivals in cutting back on mortgages that historically have shown higher rates of default.
The bank's asset management business was dragged down by large market losses and the poor results of Highbridge Capital Management, a hedge fund it owns. In October, the fund cut 10 percent of its staff and saw as much as 13 percent declines in some of its funds. Highbridge investors, like those in scores of other hedge funds, have sought to withdraw much of their capital, requiring the fund to limit requests to avoid liquidating assets at fire-sale prices.
Dimon, one of the first to sound alarms as problems spread from home equity loans to mortgages, has been unabashedly pessimistic over the past two months. During an interview with CNBC television on Dec. 11, Dimon warned that his company's business was "terrible" in November and December. "It was said that it would be a tough quarter, with shares in JPMorgan down 11 percent that day. Since then, the word "terrible" seems attached to the description of the company's earnings. Yet Dimon also noted that the bank had done several things in the past year to try to help stabilize the overall economy.
The bank extended $100 billion in new credit in the fourth quarter, and had said that they assumed risk and expended resources to assimilate Bear Stearns and Washington Mutual. In addition, he said, the bank had prevented more than 300,000 foreclosures and expected to assist more than 300,000 families with loan modifications over the next two years. (2,5) What still looms over big banks are enormous potential losses as millions of consumers default on their debt. But especially for the likes of JPMorgan, corporate debt is becoming an increasingly large problem.
Leveraged loans, or those that backed private equity deals struck at the height of the credit boom, continue to weigh on corporate balance sheets. The proprietary trading that long charged banks' earnings remains terrible. And in a worrisome development, one that extends to regional and community banks, loans made to small businesses, retailers and real-estate developers have also come under pressure. So long as the global economy continues to sputter and unemployment rises, analysts say the latest round of losses will take several quarters to overcome.
The first round was set off by the collapsing value of complex mortgage investments and the deep freeze of the credit markets. And for all but a small coterie of banks, several bankers and analysts have said, the U. S. government may be the only investor left. It is said that most banks are going to be in a defensive posture. They are absorbing losses, managing their balance sheet down, and are shrinking. It is not likely to see the industry expand its overall balance sheet until 2010 or 2011. 2,5) References 1. Wikepedia. org 2. www. JPmorganchase. com 3. investor. shareholder. com/jpmorganchase/press/releasedetail. cfm? ReleaseID=359235 - 50k – 4. news. moneycentral. msn. com/ticker/article. aspx? symbol=US:JPM&feed=BW&date=20090115&id=9516129 5. www. iht. com/articles/2009/01/15/business/jpmorgan. 4-408727. php - 64k - J. P. Morgan Chase and Co. Macro Economics Nilofar A. Mulla 11022 – A February 24, 2009
