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JPMorgan Chase & Co. (NYSE: JPM) is one of the largest financial institutions in the United States. Its main services include the provision of credit cards and loans and other financial services to both commercial and individual customers in addition to the underwriting of new debt and equity issuance through its investment banking division. Together, these three businesses comprised almost 75% of JPMorgan Chase's $71.3B in 2007 revenue. The firm has a significant amount of international exposure, with operations in over 50 countries and clients in every major financial market in the world.

JPMorgan Chase's performance has been relatively strong thus far; however, deteriorating conditions in the credit markets have impacted its business. In July 2008, JPMorgan wrote down the value of its mortgage-backed assets by $1.5 billion.[1] Net income for the third quarter of 2008 only came to $527 million, largely the result of losses at WaMu.[2] JP Morgan sold $25B in preferred stock to the US Government through the Troubled Assets Relief Program (TARP) in October 2008.[3] However, the money comes with increased government oversight and regulation on how the banks are allowed to run - including a cap on CEO salaries. To avoid government interference JPMorgan has announced it expects to be one of the first banks to repay the loans.[4]

In March 2008, JPMorgan announced that it would acquire Bear Stearns Companies (BSC). The deal was approved by Bear shareholders making the acquisition official and ending Bear's 85 years as an independent firm.[5] Additionally, in September 2008, JPMorgan acquired Washington Mutual (WM) after WaMu suffered a run on the bank and saw its liquidity effectively disappear.

Business Overview

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2008 Net Revenue and Net Income by Line of Business, in millions USD[6]

Investment Banking (16.8% of 2008 revenue; -21.0% of 2008 net income)

Investment banking is JPMorgan Chase's chief operation. The investment bank is employed by clients running the gamut from large corporations to governments to financial institutions. JPMorgan offers a wide range of financial services, including risk management, corporate advising, trading and market-making (enabling transactions between buyers and sellers of cash securities and derivatives), capital raising in equity and debt markets, and research. The investment bank is also responsible for investing and trading with the firm's own capital.

Both net revenue and net income declined in this segment with net income going negative. The losses were driven by writedowns of $5.9B in mortgage-related activities and $4.7B in leveraged lending commitments. These writedowns were mostly caused by subprime-related holdings and overall unfavorable global credit conditions. The acquisition and consolidation of Bear Stearns in May of 2008 also added to the poor performance of JPM's Investment Banking Segment. The segment did see record highs in returns on rates and currencies, credit trading, commodities and emerging markets.[7]

Retail Financial Services (32.3% of 2008 revenue; 15.7% of 2008 net income)

JPMorgan Chase's retail bank accounted for 32.3% of the firm's earnings in 2008. Chase has the third-largest deposit base in the U.S., and has the largest market share in large cities like Chicago and New York, with the acquisition of Bank of New York's operations. The firm also operates the third-largest ATM network in the United States and the nation's fourth-largest branch network. The segment acquired Washington Mutual for $1.9B from the Federal Deposit Insurance Corporation (FDIC) on Spetember 25, 2008.

The division's net income fell substantially to $880 million in 2008 from $2,925 in 2007. Although Net interest Income rose due to the acquisition of Washington Mutual (WM), a large provision for loan loss offset these gains. JPMorgan had to set aside more money to cover losses in both subprime mortgages and prime mortgages. The segment's loan loss provision also increased due to a rise in predicted losses in auto, student, and business loans.[8]

Credit Card Services (22.6% of 2008 revenue; 13.9% of 2008 net income)

Chase Card Services, JPMorgan's brand for its credit card services business, is the second-largest domestic issuer of Mastercard (MA) and Visa (V) cards, with a total of 168 million of its cards in circulation. Chase manages more than $190 billion in loans for customers ranging from individual consumers to small businesses. The business has grown naturally and through the acquisition of Washington Mutual's credit card operations. Chase Card Services has recently focused on expanding its network of private-label cards, which are cards issued by a specific retailer and are accepted only by the issuing retailer. Chase's current partners include BP (BP), Circuit City (CC), and Kohl's (KSS). Chase also issues cards jointly with various organizations, including Walt Disney Company (DIS), AARP, Marriott (MAR), Sony (SNE), and Amazon.com (AMZN). Private-label cards, while they offer better growth opportunities than traditional bank-issued cards, typically experience higher rates of delinquency, which adds additional risk to Chase's private-label expansion.

Credit Card services accounted for 22.6% of 2008 revenue. Net income declined by 73% from the previous year due to a higher provision for credit losses. The worsening economic condition has increased the likelihood of charge-offs and a higher delinquency rate.[9]

Asset Management (10.4% of 2008 revenue; 24.2% of 2008 net income)

JPMorgan's asset management division provides retail investors, institutions, and high-net-worth individuals worldwide with investment and wealth management. The division's products and services include management of equities, hedge funds, real estate, fixed income, and private equity investments, as well as trust and estate services for its high-net-worth clients. Asset Management is the leader in asset management with over $1.5 trillion in investment and wealth management. In 2008, the segment's net profit and net revenue both fell. This was caused by lower performance fees from a weaker market overall. As whole, the weakening credit market hurt the segment's performance.[10]


Treasury & Securities Services (11.2% of 2008 revenue; 31.5% of 2008 net income)

Treasury Services provides cash management, trading, and other services to corporations, financial institutions, and government entities. Securities Services holds, values, and clears securities, cash, and alternative investments for investors and broker-dealers, essentially facilitating transactions on stock markets across the world. In 2008, this division made record profits of $1.8B and a record net revenue of $8.1B on record net revenue of $6.9 billion. Increased usage of its products and services by clients, growth in the volume of electronic transactions, and larger loan balances all contributed to the segment's performance in 2008.[11]

Commercial Banking (6.6% of 2008 revenue; 23.7% of 2008 net income)

Commercial banking is a small but strong component of Chase's business, serving over 26,000 clients across the U.S. This division provides a range of banking services to corporations, government agencies, non-profits, and other financial institutions. Comprising only 6.6% of the firm's income, the commercial bank has earned record profits in both 2008 and 2007. The segment added $44.5B in loans from the acquisition of Washington Mutual and $2.3B in loans and $1.2B in deposits from the acquisition of The Bank of New York. The segment's share of net income has risen in recent years as the other segments have performed poorly while Commercial Banking has maintained growth.[12]

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2007-2008 Net Income Comparison by Line of Business, in millions USD[13]
Income Statement $M [14]
2004 2005 2006 2007 2008[15]
Non-interest Revenue ($M) 25,845 34,693 40,757 44,966 28,473
Net Interest Income ($M) 16,527 19,555 21,242 26,406 38,779
Total Net Revenue ($M) 42,372 54,248 61,999 71,371 67,252
Total Net Income ($M) 4,466 8,483 14,444 15,365 5,605

Trends and Forces

Effects of housing market slowdown

With the slowdown the housing market from 2007 and into 2008 and 2009, JPMorgan's mortgage lending business is being hit by the slow growth and decreases, in residential real estate prices. The economy as a whole is experiencing the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less, which has negative repercussions for many of JPM's businesses. The number of total housing starts has fallen by 63% of their peak levels during the end of the housing boom.[16] During the last 3 months of 2008, the nation's banks recorded a total of $26.2B in losses and faced a weighted average of 94% fall in profits.[17] JPMorgan's Investment Bank and Asset Management segments has specifically taken setbacks due to higher loan loss provisions from mortgages.

Downturn in US Economic Cycle

US Global gross domestic product fell between .3% - .5% in the Third Quarter 2008 and fell by 6.1% in the Fourth Quarter.[18] The CBO is predicting that there will be a 1.5% decrease in GDP in 2009.[19] As the US economy continues to shrink, JPM and all other firms will continue to face pressure as investments become less profitable and consumer spending falls.

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Interest Rates

In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 0-.25% in December 2008.[20] These measures were largely aimed at stimulating economic activity in the face of a potential recession caused by fallout in the subprime lending industry. JPMorgan will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand. It will also make it a lot easier for JPM to get credit at low interest rates which will improve its ability to provide loans.

Bear Stearns Buyout

In March of 2008, JPMorgan announced its intention to acquire troubled investment bank Bear Stearns Companies (BSC) for $2.32 per share, significantly less than its closing price of around $30 on the previous trading day. This sent Bear Stearns shareholders into an uproar, which eventually led JP Morgan to raise its offer to about $10 per share, more than four times the original bid. The takeover was approved by shareholders on May 29, 2008. JP Morgan hopes to take advantage of Bear's name and customer relationships to augment its existing investment banking operations. Bear's private equity unit will be spun off, however, as an independent company. JP Morgan will retain a $1 billion stake in Bear Stearns Merchant Banking, which manages about $5 billion.[21]

JP Morgan buys Washington Mutual (WM) - its second large acquisition of a troubled bank

JP Morgan also acquired Washington Mutual on September 25, 2008 for $1.9B. This purchase includes $307B in assets and $188B in deposits [22] JP Morgan will have to work to integrate the two companies together - WaMu is the largest bank, in terms of assets, in history to fail. JP Morgan announced that it plans to lay off 9,500 employees, nearly 1/4th during the transition process. [23] JP Morgan is also at much higher risk because the $307B assets are troubled, and could negatively effect JP Morgan and its balance sheet.


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Global M&A Market Share for the first nine months of 2007[24]

JP Morgan Chase & Co. ranked third among the large US money center banks in terms of assets and second in terms of net revenue for the year 2007.

2009 data Assets ($B)[25] Revenue ($B)
Bank of America $2,300 $113
J P Morgan Chase (JPM) $2,000 $101
Citigroup (C)' $1,800 $106
Wells Fargo (WFC) $1,200 $51.7
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J.P. Morgan has the lowest NIM

Chase Card Services, a part of JPMorgan Chase, surpassed Bank of America as the top issuer of Visa and Mastercard in 2006 and has maintained its dominance since then.

Outstanding ($B) Market Share (%)
JPMorgan Chase 183.32 19.3
Bank of America 166.32 17.5
Citigroup 106.74 11.2
American Express 88.02 9.3
Capital One 60.08 6.3

JPMorgan is ranked third in its market share of total deposits in the US behind Bank of America and Wells Fargo. WFC surpassed JPMorgan after it acquired Wachovia (WB) in December of 2008.

Domestic Deposit Market Share (%)
2004 2005 2006 2007 2008[27]
Bank of America (BAC) 10.07 10.36 9.54 10 11.33
Wells Fargo (WFC) 4.90 4.64 5.20 4.2 10.33
J P Morgan Chase (JPM) 4.18 7.07 7.47 7.4 9.85



  1. JPMorgan struck by $1.5bn writedown
  2. 3Q08 Earnings Press Release - JPMorgan Chase & Co.
  3. Bloomberg Press "Citigroup, JPMorgan Chiefs Summoned to Discuss TARP" 2 Feb 2009
  4. BloggingStocks "Will JPMorgan Chase be the first to repay its TARP loan?" 9 Feb 2009
  5. Bear's Final Moment: An Apology and No Lack of Ire - WSJ.com
  6. - page 2, 10
  7. JPM 10-K 2008 "Investment Bank" pp. 42-43
  8. JPM 10-K 2008 "Retail Financial Services" pp. 45
  9. JPM 10-K 2008 "Credit Card Services" pp. 51
  10. JPM 10-K 2008 "Asset Management" pp. 58
  11. JPM 10-K 2008 "Treasury & Securities Services" pp. 56
  12. JPM 10-K 2008 "Commercial Bank" pp. 54
  13. JPMorgan Chase & Co. Annual Report 2008 - page 2
  14. JPMorgan Chase & Co (JPM.N) Financial Statements | Stocks | Reuters.com
  15. JPM 10-K 2008 "Selected Financial Data" pp.38
  16. Housing Economics "Housing Starts State & Metro Forecasts for 2008-2009"
  17. Star Tribune "FDIC says US banks posted $26.2 billion loss at end of 2008, first quarterly loss since 1990" 26 Feb 2009
  18. About.com The US Economy "GDP Current Statistics"
  19. Forbes Business "US ECON: CBO's 2009 Outlook Worsens, Sees 1.5% GDP Drop" 20 March 2009
  20. Federal Reserve Board "Open Market Operations" 16 Dec 2008
  21. JP Morgan Spinning Off Bear Stearns Private Equity Unit
  22. CNN Money: "JPMorgan buys WaMu" 26 Sept 2008
  23. Business Week: "JPMorgan cutting 9,200 jobs at Washington Mutual" 1 Dec 2008
  24. WSJ.com - M&A Bubble Bursts
  25. Herald Tribune "Bank of America claims top spot in assets" 15 June 2009
  26. CreditCards.com "Credit card statistics, industry facts, debt statistics" 20 March 2009
  27. FDIC Quarterly 2008, Volume 2, No. 4 "Highlights from the 2008 Summary of Deposits Data"
  28. FDIC "Summary of Deposits" June 2008
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