How did earnings change in 1999, and what drove the increase?

Reported net income rose 44% to $5.45 billion. Operating earnings rose 34% to $5.39 billion. The main driver was market-sensitive revenue, up 47% to $7.39 billion, led by $2.52 billion in private equity gains (up $1.56 billion), $2.88 billion in trading-related revenue (up 48%), and $1.89 billion in investment banking fees (up 26%). Less market-sensitive revenue grew 7% to $15.59 billion. Management notes that private equity gains are unpredictable and can vary significantly from period to period.

Is the company's capital position sufficient, and what is it doing with excess capital?

The Tier 1 capital ratio was 8.4% (versus management's 8% to 8.25% target range) and the total capital ratio was 12.1%, both above regulatory minimums of 4% and 8%. Excess capital went to net share repurchases of $2.3 billion, the $1.46 billion H&Q acquisition, and a dividend increase of 14%. The board also authorized a new $5 billion repurchase program in January 2000. Risk-weighted assets rose about $5 billion, partly from Year 2000 related balance sheet management and client cash management activity.

What are the main litigation and regulatory risks?

Sumitomo Corporation alleges that Chase Manhattan Bank funded unauthorized loans that facilitated copper trades between 1994 and 1996, seeking $532 million under RICO (subject to trebling) plus punitive damages. Five of eleven suits against Chase Securities Inc. over the failure of Commercial Financial Services seek about $930 million. Separately, the SEC has begun an investigation into whether bond paying-agent recordkeeping deficiencies violated transfer agency rules. Management believes these matters will not have a material adverse effect on consolidated financial condition, but they could be material to results for a particular period.

How is credit quality trending?

Overall credit quality improved. The allowance for loan losses fell 3% to $3.46 billion, or 1.96% of year-end loans. Net charge-offs on managed credit-related assets were 1.23% (1.14% in 1998). The commercial net charge-off rate rose to 0.63% from 0.40%, mainly because of a deteriorated large Asian customer and lower recoveries. Consumer charge-offs declined, helped by lower bankruptcies and a stronger credit card portfolio. Management expects commercial net charge-offs to average 40 to 60 basis points over time.

JPM 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 13, 2000. Cited figures are marked; the original filing is the authoritative source.

This Form 10-K for fiscal 1999 from The Chase Manhattan Corporation (the filer; it was later merged into JPMorgan Chase) reports a strong year.

Reported net income rose 44% to $5.45 billion^a, and diluted EPS rose 48% to $6.27. On an operating basis, which excludes credit card securitization effects, restructuring costs and special items, earnings rose 34% to $5.39 billion and diluted operating EPS rose 38% to $6.21. Operating revenue grew 17% to $22.98 billion.

Growth came mainly from market-sensitive revenue, which rose 47% to $7.39 billion^b, driven by $2.52 billion of private equity gains from Chase Capital Partners and strong investment banking fees and trading revenue. Less market-sensitive revenue grew 7%. Capital was strong.

The Tier 1 capital ratio was 8.4% and the total capital ratio 12.1%, with all bank subsidiaries rated well capitalized. Chase repurchased a net $2.3 billion^c of stock in 1999, raised the quarterly dividend 14% to $0.41, and authorized a new $5 billion buyback in January 2000. It also acquired Hambrecht & Quist for $1.46 billion in December 1999.

Credit quality improved overall, though commercial net charge-offs rose on a single large Asian exposure, and the allowance for loan losses fell 3% to $3.46 billion^d. Investors should note several risks: a Sumitomo lawsuit seeking $532 million (subject to RICO trebling), claims of about $930 million against its Chase Securities unit in the CFS asset-backed securities litigation, and an SEC investigation tied to bond paying-agent recordkeeping deficiencies.

Management says none of these is expected to have a material adverse effect on consolidated financial condition, though results could be affected in a given period. The company also expected to become a financial holding company under the Gramm-Leach-Bliley Act around March 13, 2000.

02—Key points

Key Highlights

Reported net income of $5.45 billion (+44%) and diluted EPS of $6.27 (+48%); operating diluted EPS of $6.21 (+38%).
Operating revenue rose 17% to $22.98 billion, with market-sensitive revenue up 47% to $7.39 billion, including $2.52 billion in private equity gains.
Return on average common equity was 24.5% reported and 24.2% operating, well above the company's 18% target.
Tier 1 capital ratio of 8.4% and total capital ratio of 12.1%; all bank subsidiaries well capitalized.
Net stock repurchases of $2.3 billion in 1999, a 14% dividend increase to $0.41 per quarter, and a new $5 billion buyback authorized in January 2000.
Acquired Hambrecht & Quist Group for $1.46 billion in December 1999, adding New Economy equity underwriting and advisory capabilities.
Material legal exposure: Sumitomo lawsuit seeking $532 million (trebled under RICO) and CFS-related claims of about $930 million against Chase Securities, plus an SEC investigation into bond recordkeeping.

03—Questions

Frequently Asked Questions

How did earnings change in 1999, and what drove the increase?
Reported net income rose 44% to $5.45 billion. Operating earnings rose 34% to $5.39 billion. The main driver was market-sensitive revenue, up 47% to $7.39 billion, led by $2.52 billion in private equity gains (up $1.56 billion), $2.88 billion in trading-related revenue (up 48%), and $1.89 billion in investment banking fees (up 26%). Less market-sensitive revenue grew 7% to $15.59 billion. Management notes that private equity gains are unpredictable and can vary significantly from period to period.
Is the company's capital position sufficient, and what is it doing with excess capital?
The Tier 1 capital ratio was 8.4% (versus management's 8% to 8.25% target range) and the total capital ratio was 12.1%, both above regulatory minimums of 4% and 8%. Excess capital went to net share repurchases of $2.3 billion, the $1.46 billion H&Q acquisition, and a dividend increase of 14%. The board also authorized a new $5 billion repurchase program in January 2000. Risk-weighted assets rose about $5 billion, partly from Year 2000 related balance sheet management and client cash management activity.
What are the main litigation and regulatory risks?
Sumitomo Corporation alleges that Chase Manhattan Bank funded unauthorized loans that facilitated copper trades between 1994 and 1996, seeking $532 million under RICO (subject to trebling) plus punitive damages. Five of eleven suits against Chase Securities Inc. over the failure of Commercial Financial Services seek about $930 million. Separately, the SEC has begun an investigation into whether bond paying-agent recordkeeping deficiencies violated transfer agency rules. Management believes these matters will not have a material adverse effect on consolidated financial condition, but they could be material to results for a particular period.
How is credit quality trending?
Overall credit quality improved. The allowance for loan losses fell 3% to $3.46 billion, or 1.96% of year-end loans. Net charge-offs on managed credit-related assets were 1.23% (1.14% in 1998). The commercial net charge-off rate rose to 0.63% from 0.40%, mainly because of a deteriorated large Asian customer and lower recoveries. Consumer charge-offs declined, helped by lower bankruptcies and a stronger credit card portfolio. Management expects commercial net charge-offs to average 40 to 60 basis points over time.

04—Continue

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