How did JPMorgan Chase perform in 2005 compared with 2004?

Reported net income rose to $8.5 billion, or $2.38 per diluted share, from $4.5 billion, or $1.55, in 2004. Comparisons are distorted because 2004 included only six months of the combined firm after the July 2004 Bank One merger. On an operating basis, which excludes merger costs and nonoperating litigation charges, earnings were $10.5 billion, or $2.95 per share.

What were the major one-time charges in 2005?

The firm recorded a $1.9 billion pre-tax charge related to the Enron Newby class-action settlement and other material legal matters, and a $900 million charge for the WorldCom class-action settlement, partly offset by a $208 million insurance recovery. Merger costs were $722 million. Together these reduced after-tax earnings by roughly $2.0 billion, or $0.57 per share.

What are the key litigation risks investors should watch?

The IPO allocation litigation includes securities class actions, an antitrust case under Second Circuit review, and the LaSala actions. The National Century Financial Enterprises matters involve indenture-trustee claims, with settlements of $375 million for noteholders and $50 million for the UAT announced in February 2006, subject to court approval. The SEC is also considering civil actions. The firm says existing reserves should not materially affect financial condition, but outcomes could exceed accruals.

How strong is the firm's capital position?

At year-end 2005 the Tier 1 capital ratio was 8.5%, the total capital ratio was 12.0%, and the Tier 1 leverage ratio was 6.3%, all above the well-capitalized thresholds of 6.0%, 10.0%, and 5.0% respectively. Stockholders' equity was $107.2 billion. The firm noted that restricted core capital elements, mainly trust preferred securities, were 16.5% of core capital versus a 15% limit that must be met by March 2009.

What is management's 2006 outlook?

Management expects higher wholesale credit provisions as losses normalize from very low levels, and the Investment Bank expects lower credit portfolio revenue. Retail banking should benefit from branch expansion but face spread pressure from higher rates. Credit card charge-offs should fall in the first half of 2006 because of pulled-forward bankruptcy filings, then rise in the second half under new minimum-payment rules. Merger savings are expected to reach about $2.8 billion run-rate by end-2006.

JPM 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2006. Cited figures are marked; the original filing is the authoritative source.

JPMorgan Chase & Co. closed 2005 as its first full year after the July 2004 Bank One merger, earning $8.5 billion^a, or $2.38 per diluted share, versus $4.5 billion ($1.55) in 2004.

Return on common equity was 8%, versus 6% in 2004. Results absorbed roughly $2.0 billion^b in after-tax charges (about $0.57 per share), mainly the $2.2 billion Enron class-action settlement and the $900 million WorldCom settlement. Excluding those charges and merger costs, operating earnings were $10.5 billion, or $2.95 per share, with operating ROE of 10%.

Total net revenue rose 27% to $54.5 billion^c, driven largely by the Merger, while noninterest expense rose 13% to $38.8 billion. The balance sheet reached $1.2 trillion in assets, with $107 billion of stockholders' equity and a Tier 1 capital ratio of 8.5%. Loans grew 4% to $419 billion and deposits rose 6% to $555 billion.

Management reported merger savings of about $1.5 billion^d in 2005 and an annualized run-rate of $2.2 billion entering 2006, targeting roughly $3.0 billion by end-2007. The Firm repurchased 93.5 million shares for $3.4 billion during the year.

Looking ahead, management expects 2006 wholesale credit provisions to rise toward more normal levels, while consumer credit card charge-offs should be lower in the first half and higher in the second half as new FFIEC minimum-payment rules take effect. Key open risks include the IPO allocation antitrust and securities litigation, the National Century Financial Enterprises matters, and continued rate-driven pressure on loan and deposit spreads.

02—Key points

Key Highlights

Net income of $8.5 billion ($2.38 diluted EPS) rose 90% from $4.5 billion in 2004, though it includes about $2.0 billion of after-tax charges; operating earnings were $10.5 billion ($2.95 per share).
Return on common equity was 8% (10% on an operating basis), up from 6% in 2004, still modest for a large money-center bank.
Total net revenue grew 27% to $54.5 billion, mainly from the Bank One merger, while the provision for credit losses rose 37% to $3.5 billion, including a $400 million Hurricane Katrina special provision.
Nonoperating litigation charges included $2.2 billion for the Enron Newby class-action settlement and $900 million for WorldCom, partly offset by a $208 million insurance recovery.
Total assets of $1.2 trillion, a Tier 1 capital ratio of 8.5%, and a Tier 1 leverage ratio of 6.3% indicate a well-capitalized balance sheet.
The Firm repurchased 93.5 million shares for $3.4 billion in 2005 and paid a $0.34 quarterly dividend, a 57% common payout ratio based on reported net income.
Merger savings reached about $1.5 billion in 2005 with a $2.2 billion annualized run-rate heading into 2006, targeting about $3.0 billion by end-2007.

03—Questions

Frequently Asked Questions

How did JPMorgan Chase perform in 2005 compared with 2004?
Reported net income rose to $8.5 billion, or $2.38 per diluted share, from $4.5 billion, or $1.55, in 2004. Comparisons are distorted because 2004 included only six months of the combined firm after the July 2004 Bank One merger. On an operating basis, which excludes merger costs and nonoperating litigation charges, earnings were $10.5 billion, or $2.95 per share.
What were the major one-time charges in 2005?
The firm recorded a $1.9 billion pre-tax charge related to the Enron Newby class-action settlement and other material legal matters, and a $900 million charge for the WorldCom class-action settlement, partly offset by a $208 million insurance recovery. Merger costs were $722 million. Together these reduced after-tax earnings by roughly $2.0 billion, or $0.57 per share.
What are the key litigation risks investors should watch?
The IPO allocation litigation includes securities class actions, an antitrust case under Second Circuit review, and the LaSala actions. The National Century Financial Enterprises matters involve indenture-trustee claims, with settlements of $375 million for noteholders and $50 million for the UAT announced in February 2006, subject to court approval. The SEC is also considering civil actions. The firm says existing reserves should not materially affect financial condition, but outcomes could exceed accruals.
How strong is the firm's capital position?
At year-end 2005 the Tier 1 capital ratio was 8.5%, the total capital ratio was 12.0%, and the Tier 1 leverage ratio was 6.3%, all above the well-capitalized thresholds of 6.0%, 10.0%, and 5.0% respectively. Stockholders' equity was $107.2 billion. The firm noted that restricted core capital elements, mainly trust preferred securities, were 16.5% of core capital versus a 15% limit that must be met by March 2009.
What is management's 2006 outlook?
Management expects higher wholesale credit provisions as losses normalize from very low levels, and the Investment Bank expects lower credit portfolio revenue. Retail banking should benefit from branch expansion but face spread pressure from higher rates. Credit card charge-offs should fall in the first half of 2006 because of pulled-forward bankruptcy filings, then rise in the second half under new minimum-payment rules. Merger savings are expected to reach about $2.8 billion run-rate by end-2006.

04—Continue

← View all 10-K filings