JPMorgan Chase & Co. Q4 2008 Earnings Call Transcript

Jan.21.09 | About: JPMorgan Chase (JPM)

JPMorgan Chase & Co. (NYSE:JPM)

Q4 2008 Earnings Call

January 15, 2009 7:45 am ET


Michael Cavanagh – CFO

James Dimon – President & CEO


Glenn Schorr - UBS

John McDonald - Sanford C. Bernstein

Betsy Graseck - Morgan Stanley

Mike Mayo - Deutsche Bank

Meredith Whitney - Oppenheimer

Nancy Bush – NAB Research


Good morning ladies and gentlemen. Welcome to the JPMorgan Chase fourth quarter 2008 earnings call.

Today's presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risk and uncertainties.

Factors that could cause JPMorgan Chase’s actual results to differ materially from those described in the forward-looking statements can be found in the firm’s filings which could differ materially from those described in the forward-looking statements that can be found in the firm’s filing with the Securities and Exchange Commission and you can refer to these fillings.

These filings are available on both JPMorgan Chase’s and Securities and Exchange Commission websites.

JPMorgan Chase does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements. Please also note that today’s presentation may include references non-GAAP financial measures, and you should refer to the information contained in the written slides accompanying this presentation for information about the calculation. The slides are available at JPMorgan Chase’s website.

(Operator Instructions) At this time I'd like to turn the call over to JPMorgan Chase's Chairman and Chief Executive Officer, James Dimon, and Chief Financial Officer, Michael Cavanagh; Mr. Cavanagh please go ahead sir.

Michael Cavanagh

Good morning everybody thanks for joining us early this morning. We simply wanted to get our results out as soon as they were ready so appreciate your patience in us moving the time on this. As usual we’re going to do the presentation but I’m going to cover it pretty quickly since there’s a lot of material in here but slow down on certain slides to really make sure I’m very clear about what’s in them and then we’ll take some Q&A at the end.

So if you start on the presentation just quickly on the first slide, you see that our full year profits for 2008 were $5.6 billion or $1.37 a share driven down substantially from the prior year by higher credit costs of $22 billion but really the point here is absorbing that substantial increase was the very high and strong pre-provision profits that you can see, the $73 billion of revenues less the $43 billion of expenses to give you $30 billion pre-tax pre-provision profitability which is obviously a big part of the story as well across all the businesses.

If you go to the next slide, slide two, I’ll only point out here that for the quarter $702 million of net income or $0.07 of EPS. Rather then spend time here as usual it’s best to go through this business by business which I’ll do but first let’s just hit slide three and let me spend a minute just to flag for you what are the big items that are imbedded in that $0.07 of results.

And so here on slide three fourth quarter significant items, you see a variety of negatives and positives which are baked in there so let’s just walk down them from the top. So first one, $4 billion pre-tax increase to our loan loss reserves for $2.5 billion after-tax. That brings our total loan loss reserves to $24 billion from $10 billion a year ago.

Next item is $2.9 billion pre-tax of net markdowns on leveraged loans and mortgage exposures. The exposures we’ve been talking to you about for the last several quarters now and that’s in the investment bank. The next item, merger-related items that really reflects a gain related to the net positive impact of a variety of refinements to the purchase accounting estimates for WaMu which as we said last quarter would get refined in the first quarter given that we did the deal five days before the end of last quarter so it’s negative goodwill, that flows through the income statement as a gain of $1.1 billion after-tax.

Next MSR risk management results of $1.4 billion pre-tax, $900 million after-tax. We just point this out because the bigger then usual number and this is the money we made taking some risk in the way we manage and hedge the change in value of the MSR asset in the mortgage banking part of retail.

Next is $1.1 billion pre-tax of private equity write-downs shown in corporate and lastly as you saw in our 10-Q because this happened very early in the quarter the $600 million after-tax Paymentech gain on sale.

So with all those items just flagged for you and the businesses over to the right in which they appear, I won’t harp on those again, so now let’s just start with the investment bank on slide four. So let me start you up on the upper right side of the page in the box, so you see net loss for the quarter of $2.4 billion in the investment bank and this table is its own sort of significant items table for the investment bank.

So the leverage lending markdowns and the mortgage-related markdowns flagged for you on the prior page and I’ll show you where we stand on those positions in a second. Credit costs, this is additions to reserves shown on the prior page, total $4 billion pre-tax for the firm, $700 million pre-tax in the investment bank in the quarter and then the last item is the impact of spread tightening on structured liabilities, an item we’ve been talking about over the past several quarters for $700 million pre-tax. Those items come down to, if you tax effect them but not comp effect just to be clear what I did here, that’s $2.7 billion after-tax impact in the quarter where there wasn’t a comp accrual is the way I did that.

I just make one additional point that typically we see when our spread tightens and we have a reduction in value of our structured liabilities on the liability side, our counterparty payables on the asset side of the balance sheet tend to increase in value and have an offset. In this quarter the spreads didn’t behave in the same relationship so actually what’s known as CVA, the value of our counterparty receivables adjustment actually was a meaningful negative number as well.

So now if you just walk down the bullets and the P&L, aside from those items that are in the box above you see investment banking fees of $1.4 billion revenue, that’s down 17% from a year ago but you see on the next slide, I’ll show you the continued leading market position that we have in corporate finance across all categories is very substantial.

Next line the $1.7 billion fixed income markets negative revenue for the quarter. If you net out the DVA leverage loan marks and mortgage marks from above, that brings you back to $1.6 billion positive revenue and really the story there is weak trading in the credit related products offset again by continued very strong and record performance in rates and currencies and continued strength in commodities and emerging markets which has been a story for the last several quarters.

Moving down to equity markets, negative revenues of $94 million in total. You net out the impact of spread tightening and that’s $260 million positive so that’s again weak trading particularly, weak trading results offset in part by strong client revenues particularly in the prime service businesses.

Next is credit costs driving the P&L, $765 million, a little bit of charge-offs in the quarter but again the bulk of that is the nearly $700 million addition to loan loss reserves that brings, you can see in the table to the left, the allowance to total loans in the investment bank of 4.71%, up substantially from last quarter and last year as you can see for yourself, 1.93% a year ago to 4.71% now. So while credit is degrading we think we’re doing what we should be doing to bolster the loan loss reserves through the P&L.

Lastly expenses down 9%, lower compensation expense 63% comp to revenue ratio for the year trued up in the fourth quarter and all that brings you down to the $2.4 billion bottom line loss that you see here in the investment bank.

Next slide, slide five, you see the standing of the investment bank and the client franchise and you can look for yourself at this and see how strong the franchise position is and understand why despite the challenging environment that we’re in we’re very confident about the ability to deliver in the investment banking business, strong results looking ahead.

Slide six, don’t need to spend much time on. You’ve seen this before but when you take the $1.8 billion of markdowns, now I’m on leveraged lending, it’s the $1.8 billion of markdowns takes us down to $12.6 billion of [notional] commitments remaining that have a total markdown cumulative of $5.7 billion or 45% so the carrying value of $6.9 billion of market exposure is where we currently have our remaining legacy leverage loans at $0.55 on the $1 on average but obviously that goes loan by loan, name by name, piece by piece.

Slide seven is then the last page on the investment bank and it’s just a recap of again what we’ve shown you last quarter. If you start in the box in the upper left, it’s the aggregate exposures we have in these various residential and commercial mortgage exposures. So last quarter we ended the quarter with $18.6 billion worth of exposure. You see in the middle column $3.9 billion reduction in the quarter to end at $14.7 billion.

Obviously the marks came down, that was $1.1 billion of markdowns embedded in the $3.9 billion of exposure reduction. The bulk of that against the commercial exposure there where you see $9.3 billion of exposure at the end of last quarter, total reduction of $1.6 billion and then ending just under $8 billion.

So moving past the investment bank, slide eight I just wanted to show you how we are now for the first quarter including the operating results of Washington Mutual in the particularly the remaining businesses here and so what I’ve shown you and you’ll see this in our supplement as well, is the top half is the way JPMorgan Chase was reporting its businesses that were effected previously, and so at the bottom is how we’ve revamped some of our disclosures and I’ll walk across that across the bottom.

So the first two buckets are going to be the two new segments of disclosure within retail financial services, so retail financial services will still be one of our six business units but we’ll break those results down in to retail banking which is going to be really the branch banking business as well as business banking and the related loans in business banking and WaMu branches will go into that business.

Moving over its consumer lending and then for all the remaining lending activities aside from business banking, all the origination and balance activities, so that’s home lending, education, auto etc., will be shown and reported in this business as well as mortgage production and servicing and again related WaMu activities reported beginning this quarter in there.

And then over on the right side of the page you see card services and commercial bank, disclosure exactly the same as before but as we get to those businesses you can look at the supplement and see we’re just enhancing some of the disclosure items that are embedded in these businesses to help you understand what we picked up from WaMu, where it’s relevant.

Slide nine, I won’t spend a lot of time on, but we just break down now the key statistics that drive the P&L for both retail banking on the top half of the page and consumer lending at the bottom the way we always do. So just at the top half I’d just point out the healthy underlying trends. We feel good about them, average deposits of $340 billion, up a bit year-over-year ex WaMu and then in the case of WaMu deposits have been stabilizing and have stabilized and that’s reflective of the fact that we’ve been adjusting pricing and have not seen a run off in deposits there which we think is a very good sign and very good for the business.

And branch production stats very strong as well. Obviously at the bottom you see origination activities down and that’s driven by generally speaking the tighter underwriting standards that we’ve been talking about across the various portfolios.

Slide 10 now the retail overall P&L, so retail top few lines is just the consolidated retail financial services business earned $624 million for the quarter. But going to the pieces the second bullet and middle of the page on the left, it’s retail banking, $1,040 million of profit in the quarter, up 85%. Obviously that includes WaMu with total revenue of $4.5 billion for the quarter. That billion dollar number just stare at that for a second, that is a powerful source of ongoing earnings that we are going to continue to invest in and grow so we feel very good about the profit line in this business.

Next you go down to consumer lending, which I described what that is and you see the net income loss of $416 million and that obviously includes to the negative the additional higher credit costs, $3.3 billion which is higher losses as well as the addition of loan loss reserves which related to the residential real estate portfolio is $1.6 billion of the $4 billion of additions to reserves running through that $3.3 billion of credit costs and then on the revenue line, noninterest revenues of $2.1 billion includes that positive MSR risk management result I talked about earlier.

Next slide, slide 11 I just wanted before going through the stats on the key portfolios, just to show you a page that shows you how WaMu balances coming into our credit reporting is going to have an effect on our credit stats as you try to think about them versus the past and compare them to others. So I’ll just quickly run down the page, so first row of numbers is Chase so that’s legacy Chase consumer lending $205 billion of balances, $1.5 billion of charge-offs, 2.98% charge-off rate for the quarter and allowance against that of $7.4 billion or 3.62% coverage.

When you add in the portion of the WaMu balances that we didn’t impair obviously that’s a selection of loans that are performing really well, so that’s $58 billion with zero charge-offs in the quarter. That will obviously grow over time and obviously has the conforming loan loss allowance will be put against but that’s at a lower level then Chase so when you blend those two together the charge-off rate comes down to 2.32% and coverage to 3.16%.

But that is the row, the blue line, the blue shading you will see that row hence forward in our supplemental disclosures and we really think that that is the relevant line looking at the credit stats related to our non-credit impaired consumer-lending portfolio. We’ll also show you the total including the impaired portfolio which you see on the next line which is $89 billion but obviously we marked that so that doesn’t reflect charge-offs in it so it further dilutes down charge-off rates and allowance coverage ratios.

I’ll quickly hit the next few slides, you’ve seen these before, the main point if you look at the delinquency trends on the upper left is that delinquencies continue to go higher. If you move over to the upper right box you see that dollar charge-offs in our home equity portfolio which were $770 million in the quarter, charge-off rate of 2.67% and that’s all in. When you look at just the portion of $95 billion or so that’s heritage JPMorgan you see that same $770 million drives a charge-off rate against the legacy portfolio of 3.24% so obviously the loss trend up more dramatically then when you look at it on a blended basis.

And the key points at the bottom, last bullet, that we do see continued deterioration. We expect that that $770 million of quarterly charge-offs could progress towards a billion dollars plus or minus per quarter over the next several quarters hence the addition to loan loss reserves in the quarter.

Next slide, same thing on prime, $195 million charge-offs in the quarter, 1.20% charge-off rate, 1.97% charge-off rate for heritage JPMorgan only and that our quarterly loss outlook, bottom bullet again could be as high as $400 million per quarter looking out over the next several quarters.

And then on slide 14, subprime portfolio, $319 million of net charge-offs in the quarter, 8.08% charge-off rate all in, 9.76% for heritage JPMorgan and the quarterly losses here could be as high as $375 million to $425 million a quarter over the course of 2009. Similar guidance here to what we had before, nonetheless some addition to reserve there.

Now slide 15 is important updates so let me take a second on this. We talked to you when we acquired the WaMu portfolio about some scenarios of expected lifetime losses, so if you go to the table here, let me just refresh you. The first two columns you see per prior presentation, we had said in our last presentation to you that our base estimate reflected US peak to trough HPI of down 25% that that reflected working down the page $36 billion of remaining life losses from the beginning of 2008 which then had imbedded in it $30.7 billion remaining after the close.

We also told you in the next column over that if we got to a deeper recession which we approximated could reflect a 28% peak to trough HPI that the losses could go up by $6 billion and $42 billion and $36.7 billion, we’re going to stop talking about from the beginning of the year, so if you just look at that bottom line, $31 billion up to $36.7 billion.

Now moving over to the right, current outlook and this is market outlook because we haven’t really recranked every number in here but the current markets forecast [case shield] or whatever you want to look at,, which suggests that the peak to trough may go to something more like 31%. We’ve refined or triangulated what our implied losses could be having had another quarter’s worth of work to do, that against that kind of market outlook the implied range of where losses could be, could be as high as $32 billion to $36 billion to give you a freshened up view on that.

Going down the bullets, the next important point is the second bullet, as we’ve also refined our accounting on the balance sheet our current marks reflect $32.5 billion of remainder of life losses so that puts us marked and accounted for at the bottom end but inside that range of where current market expectation is.

Next important point is that losses that we’ve actually taken thus far, its been very early, are actually inline with losses and delinquencies inline with what was imbedded in our valuation so far. And then the last point is how to think about this is that when you would have future additions to loan loss reserves, that would happen if and when the actual delinquencies and losses start to exceed what was imbedded in our initial expectations.

So I’ll leave it at that. You will hear more in Investor Day but it’s very early but we know this is an important topic so we want to just give you a freshened up view on that.

Moving on to card services, slide 16, I’ll pick up the pace a little bit, here you have, I’ll just make the point if you look at the key stats on the left side of the page, the P&L, it is all in. This is what’s in our disclosure supplement. This includes the WaMu portfolio imbedded in all the P&L data, revenue, credit costs, expense and profit, but for the key stats in order to give you all a better trend of what’s going on in the larger Chase business, we’re going to show you stats excluding WaMu as well and for the most part those will be the stats that I try to refer to in terms of how trends are behaving across the business.

So working down some of these bullets here you see the loss for the quarter of $371 million. That was really driven by the $4 billion of pre-tax credit costs up substantially year-over-year and that’s both due to higher credit costs as well as an addition to loan loss reserves of $1.1 billion in the quarter.

You see the charge-off rate circled at the bottom of the table of 5.29% in the fourth quarter which is basically inline with our last outlook but now looking ahead we do see that loss rate for 2009 beginning the year at something more like 7% and progressing across the year through to something more like 8%. Again that is on an ex WaMu type of basis so consistent with the guidance that we’ve talked about before.

I won’t run through the rest of the stats on the page but you can see them for yourselves there. Moving on next slide, 17, commercial bank, $480 million of net income is a record quarterly number for this business and that would be the case without the inclusion of WaMu so continued strong results in the business here. That’s on record revenue for a quarter of $1.5 billion, up substantially year-on-year and you can just look at the balance sheet stats, second bullet describes them to you, but the liability balances up 17%, loan growth up 11% so that’s $117 billion of loans, $114 billion of liability balances, a very well funded business.

And of that loan growth you see 11% year-over-year that’s imbedded in that is 37% growth in the government and not for profit business so James is going to talk a bit about the lending we’ve been doing but you can see it really here in this business.

And then credit costs of $190 million some signs of weakening of credit stats here so a little bit of increased charge-off, 40 basis points as well as some loan loss addition here. Treasury and securities services on slide 18, $533 million worth of record profits, up 26% from a year ago. That’s on record revenue again in both treasury services and worldwide security services in the quarter, $2.2 billion total revenue, up 17%.

And again the big drivers of that is growth in the balance sheet here. So you see $336 billion of liability balances, up 34% and we’re seeing tremendous influx of balances in this kind of environment which obviously could abate looking ahead, we’ll see. And also just looking ahead we’re conscious of a lower rate environment which could also put some pressures on spreads in this business as well as in the commercial bank on their liability balances.

Last business, slide 19, asset management quarterly profits of $255 million, down 52% year-over-year, obviously driven by what’s going on in assets under management so you see assets under management down 5% with $211 billion of market related declines offset in part by continued strong inflows, $61 billion for the quarter, $151 billion of inflows over the past year but most of that obviously in liquidity products, lower margin hence the impact on revenues, so quarterly revenues of $1.7 billion down 31% year-over-year.

Slide 20, corporate/private equity, so just walking down the table I’ve hit these numbers before for you so $1.1 billion of private equity losses, write-downs on the $6.9 billion of carrying value, that translates into $700 million after-tax loss. Corporate is slightly over $1 billion of profit, big piece of that is the Paymentech gain running through that line and then the last piece of corporate is the merger-related items which includes the extraordinary gain on WaMu offset in part by the Bear Stearns related and WaMu related merger expense.

I’ll just make a comment here, the merger related items, this number probably plus or minus $600 million after-tax in 2009 blending together WaMu and Bear Stearns which is consistent with what we’ve talked about before.

And lastly before I hand it over to James, capital management slide 21, it’s important to note that we continue to maintain an extremely strong capital position. So you see Tier 1 capital $136 billion, up from $89 billion a year ago and $112 billion last quarter. That translates on a regulatory basis into a Tier 1 capital ratio of 10.8%, up from 8.4% a year ago and 8.9% last quarter.

And looking further down those ratios in the table, I’d also just point out very strong tangible capital ratios aside from the regulatory capital ratios. Just a few more points here, in the bottom left side, I wanted you to realize we’re talking Tier 1 capital under a Basel I regime, and while we’re not on it yet we’re working towards it and understand that Basel II would be higher for us if we reported on that basis.

Second point is that really maintain this capital strength while managing the other part of balance sheet strength which is the credit reserve side, that’s up to $24 billion as I said earlier from $10 billion of one year ago. And all that ran through the P&L so to maintain a capital account the way we did goes back to the wide pre-tax margins we have pre-provision.

And then lastly I just wanted to flag for people because there’s been a lot of concern around the off balance sheet accounting rule changes, so FAS 140 and FIN46R, so while these aren’t yet released we’ve put a little table here in the bottom right so you can look at it yourself to give you an estimate of what it might mean to us.

The point for us is that we look at this all the time and on a forward basis are managing capital with this stuff in mind and you see we’ve [inaudible] to the 10-Q balances that a lot of people see of what’s off balance sheet, walk that across to what the GAAP asset impact might be, these are our best estimates and then translate that into RWA under Basel I so it could be something like 80 basis points, maybe plus or minus, but obviously that will depend on what the final rules actually look like and when they get implemented.

So with that let me hand it off to James to fill in any outlook comments that I missed.

James Dimon

Thank you very much, and I just have a few comments and then we’ll open it up to questions. On the investment bank, there are two things I’d like to talk about. One is the results on the client side have really been exceptional, the market share gains, I think that’s true on investment banking and on trading. We see a lot more client flow and we think we’re going to do very well servicing investor and corporate clients.

We get asked a lot about Bear Stearns and the impact of Bear Stearns. I hesitate to say this a little bit, we still expect to get $1 billion of earnings from Bear Stearns late in 2009 predominantly prime brokerage is doing well and energy and commodities but it also helped and aided our business in equities, fixed income and really across the board we got some terrific bankers in the deal.

However it’s hard to separate out positions that we inherited that we decided to keep or we didn’t hedge right or something like that but when we took on Bear, we did take on a lot more risk assets and we got them down substantially, we probably lost several billion dollars more then we would have in the year had we not done Bear and again, it’s hard to really separate what was our responsibility and what we inherited because we could have sold some of the things we inherited.

The retail business we’re working hard on WaMu. We’re still very excited about it, we think it’s still approximately what we told you last time what its going to do for this company. We’re very excited about the ability to build small business, private banking, asset management, and middle market on top of the retail [inaudible] platform there. We hope to consolidate all of WaMu systems by the end of the year. That’s the point where we get very comfortable about how we can grow it. We will be changing the brand in California at the end of March because I think it’s important to start using the new name in California.

You might have saw that yesterday we closed a mortgage in the mortgage business which we are obviously a very big player and we still think we’re going to be, get very good at it, and though we don’t know the real ongoing profitability of all the mortgage business, we did close the remaining broker business that we did mostly in the prime side and we just think it’s a smart thing to do because a lot of business that came through that side was just not our kind of quality.

Card, Michael gave you some numbers where losses will be higher. Now we don’t totally see that yet but we’re just kind of assuming that unemployment is going to go up and obviously that’s going to drive card. We also owe you, we’re not going to do it now, some comments on the new [you dap] so when I think we have Investor Day about what that might mean for the business and how we might adopt a chain into [you dap]. Suffice it to say here, it probably will drive profits lower and reduce the amount of credit that you can make availability and the way you can make it available to consumers, but we think we could adjust to it over time in a fairly reasonable way.

Commercial bank, all I can say is just really great results and, into reserves and MPLs and credit loss haven’t gone up that much. They have to go up. You cannot have an environment like this where you don’t see a lot of stress and strain on middle markets, so we do expect losses to go up there. Treasury and security services kind of gangbusters. I think one of the important things there to keep in mind is we also didn’t have any of the pitfalls so we feel really good how we run that business.

Asset management, results down, obviously because assets under management are down but I think the important thing here also is we’ve grown the business, more bankers, more net inflows and we also stayed away from a lot of pitfalls that have beset some other folks in that business.

Michael mentioned the balance sheet, we think we’re in very good shape. I should add that we did add and you see in the supplement, but our investment portfolio, the parent, have gone from $116 billion to over $160 billion as we try to invest on this excess liquidity we have etc. so it drives those ratios down but it’s completely discretion on our part how we use that and in the short run it drives slightly higher income in corporate as we buy some of those portfolios.

I want to mention two other things, report on one other thing, which is we started this [way forward] campaign about all the things that JPMorgan is doing to help the system, to help our clients, the small business, middle market, investment banking, and there’s going to be a lot more coming about that and you’ve seen, I think we’ve been at the forefront of mortgage modifications. We have some more information about that coming up in a day or so because we think there are more things we can do to help keep people in their homes and do a better job for the consumer.

And we’re also, in the press release we announced also that in the quarter we extended new credit of over $100 billion because there have been a lot of questions out there about whether banks are making loans. I think we’re speaking for lots of banks here, people are out making loans. This quarter alone I think we did four million new credit cards, so we extended credit card loans, corporate loans, middle market loans, we bought $1.4 billion bond issue when no one else would bid on it from Illinois.

So we’re in business. Some businesses the loan demand is actually dropping rather dramatically. We’ve also in the interbank market we have had on average $40 billion or $50 billion out and into bank market, that is also a form of lending. So people ask are banks lending to each other, well I think some are and trying to help the system that way.

And all of this is helped by the TARP so we think it’s a valid question people to ask what are doing with the TARP money and we do say it’s hard to separate exactly what is TARP money because remember we’re making loans all the time but we are trying to follow the intent and spirit of TARP which is to help the economy of the United States recover and make sure we’re financing people.

We even have done some major large syndicated leveraged finance loans and I’ll mention two, [Imbev and Mars] but there’s several others. So we’re still in business. Obviously the cost of money is higher for clients and people have tightened up some of the underwriting standards, but we’re still in business, we’re still trying to do the best we can both for our shareholders and the country.

So we will stop there and open for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Glenn Schorr - UBS

Glenn Schorr - UBS

Curious to get your thoughts on a lot of talk going back and forth on the loan remodification laws and the potential principal reductions, so you’ve done a lot of loan remods on your own, but I don’t know if there’s been a lot of principal reduction involved, just thoughts for you but really for the industry in general on what potential impact that could have on both acceleration of losses but also just the state of the securitization markets.

James Dimon

We are really trying to figure that out and all I’m going to say at this point is its legislation and we don’t know it’s going to get passed or not get passed. I do think it could have a pretty chilling effect on consumer lending in general and drive up bankruptcies in general, people go to the bankruptcy courts more but you really have to wait until the specific things come out to see what the GSE’s do, FHA and all the real specifics around it.

So we’re kind of reserving final judgment on how that would work. In the meantime we’re going forward what we think is a very good program to modify mortgages. Sometimes they include principal reduction, remember the really important thing for consumers is much more affordability and cash flows. Principal is an artificial concept when you talk about cash over a long period of time so people can afford a home, that’s what you really want to do.

It’s also very important in mortgage modification to re-underwrite. To do real income verification, real appraisals, to make sure the people can and want to live there and to do the second time around, maybe it wasn’t done so well the first time around.

Glenn Schorr - UBS

What kind of timeframe can the system, so let’s say we have some sort of new mantra going forward or let’s say everybody adapt to JPMorgan’s efforts, doing it one at a time like this seems difficult whether you go direct or through a bankruptcy judge, what kind of timeframe can we get there whatever there means.

James Dimon

I think most of the companies are doing it, have really staffed up a lot to be able to handle these kind of things. In any event no matter how you do it you’re going to do it one by one and that is the right way to do it. It’s a lot of work but obviously when home prices stabilize the foreclosures will start to go down a little bit and we’ll get through it.

Glenn Schorr - UBS

A numbers questions, [inaudible] margin up like 50 basis points, net interest income like 80% of revenues, obviously a weak revenue quarter but most of it comes on the liability side, you mentioned in the remarks a little bit but at what point do lower interest rates start to turn that around and start to actually be a hindrance.

Michael Cavanagh

It’s tough to say. We’re trying to manage our way through that as we speak. The best visibility we have would be that margin ex what goes on in the investment bank I hope would be stable percentage wise looking ahead, but we have to see how we do managing to operate around this very, very low interest rate environment.

Glenn Schorr - UBS

You grew the corporate portfolios, what you buying there. I did notice a bunch of CLOs being purchased in the fourth quarter, I’m assuming that’s part of it.

Michael Cavanagh

Right, remember we got a lot of new deposits in and so we bought a lot of mortgages. We’ve been doing a little bit of CLOs, a little bit of other credit related product. You’re going to see us do that. We’re getting some enormous spreads. We think some of them are very, very safe and sound. And we want to make money in that portfolio but we’re being cautious about how we do it and we don’t have to do all of this at once. We’re not making any big bet for the company.


Your next question comes from the line of John McDonald - Sanford C. Bernstein

John McDonald - Sanford C. Bernstein

In card, the outlook for the first quarter, almost a 200 basis point increase and the net charge-offs in your outlook, just wondering are you seeing that in the delinquencies yet, did you see a sharp acceleration in December in the delinquencies?

Michael Cavanagh

We did not see a sharp increase in delinquencies in December and I think I mentioned we don’t have full visibility of why we’ll go to 7%, that is a little bit of a guess that the economy is worse and unemployment is going to hit the 7.5% or 8% number. So we’re just saying if that happens unemployment, credit card loss will simply go up. We don’t know for a fact that’s going to happen.

John McDonald - Sanford C. Bernstein

So it’s more driven by your unemployment outlook.

Michael Cavanagh


John McDonald - Sanford C. Bernstein

In the card business as well, does margin get any benefit from the improvement in [inaudible] spreads over the past couple of weeks and what would be your outlook on that card margin.

Michael Cavanagh

The answer, it does, what really happened is it had a big negative in the third quarter and a little bit of recovery in the fourth quarter and I think we did say, I think we did say the number that it cost us, at one point it’s costing $100 million a month, that’s disappearing so it doesn’t really benefit us next year, it’s just the extra cost disappears. Some of that cost by the way ends up as a benefit in corporate because we get the benefit on the other side, that other place as a company.

John McDonald - Sanford C. Bernstein

In terms of the outlook on consumer balances, card balances and consumers are delevering and you worry about adverse selection, do you expect to grow card balances or are you looking to grow card balances in this environment.

James Dimon

It’s very hard to tell because what we see is that the consumer is spending less so card spend was down a fairly dramatic 8% in the fourth quarter. Payments are way down too so balances, we don’t know how those two are going to intercept but what we do know and I believe is that our share is going up. Remember we’re very prime so we think we’re in the kind of the more secure part of the segment and we’ve added a lot of clients so we continue to market, it’s just very hard to tell what’s going to happen to balances next year.

John McDonald - Sanford C. Bernstein

On WaMu if you put together everything that you talked about, did you get roughly $0.10 as you expected this quarter contribution from WaMu in your estimate?

Michael Cavanagh

I think ex the extraordinary gain I think it was a little bit better then $0.10.

James Dimon

Track what we kind of talked about for next year, the $0.50 type of number.

Michael Cavanagh

Which is still out outlook there.

John McDonald - Sanford C. Bernstein

And no change on the Bear, as James said, right.

Michael Cavanagh

The thing about that is that it takes time to ramp up but we talked about the fourth quarter exit rate of 2009 being the incremental profitability of about a billion dollars after-tax.

John McDonald - Sanford C. Bernstein

And is Bear a positive contribution to overall JPMorgan in this quarter?

James Dimon

No, I think we already said, and I’m not going to talk about the quarter specifically, and it’s hard to separate because we took on Bear, we consolidated the risk positions, we obviously started making decisions what to buy, what to sell, what to hedge, not to hedge, but it did add a lot of risk position to our company in areas where we already had risk like securitized product, leveraged loans, some credit, and it did cost us net, net however you look at it several billion dollars this year.

And that several billion unlike other things didn’t really have the offset of comp because we’re not punishing everyone in the investment bank for the fact that Bear cost our investment bank and I think our people in investment bank just did an exceptional job assimilating the people of Bear, the systems of Bear, and trying to really manage and de-risk and what turned out to be a terrible environment.


Your next question comes from the line of Betsy Graseck - Morgan Stanley

Betsy Graseck - Morgan Stanley

You talked quite a bit about the loan growth that you’ve been generating and you gave some examples, could you also give us a sense as to generally speaking how much of the growth is line extension on previous [inaudible] versus new relationships.

James Dimon

We’re not going to do that right now, but I think we are going to try to give more information about new credit, renewals of credit, but renewals of credit are credit and I don’t want to get into the game to act like we’re obligated to renew credit all the time. So but we are going to do that and the reason we said 100 plus is because we want to make sure we get the right numbers out there.

But you will see us give some numbers like that, in middle market, large corporate, even our investment portfolio and as I mentioned we added $50 or $60 billion but remember that is extending credit too. We’ve probably bought more mortgage securities then the government did this quarter.

Betsy Graseck - Morgan Stanley

And then can you give us your updated thoughts as to how you’re thinking about the dividend given the outlook for continued difficult environment.

James Dimon

You know we never, we’re exuberant raising the dividend and this company has enormous earnings power so and we felt obligation to pay the dividend so we feel pretty good about it, so we’re not that concerned about it.

Betsy Graseck - Morgan Stanley

Is there anything with regard to how you’re thinking about the dividend relative to having the TARP and how you think through returning TARP money versus paying the dividend out, is that at all part of the thought process?

James Dimon

I guess one is a, we feel, one is an obligation to your shareholders that you tell then when you raise the dividend and you intend to pay it. It should be consistent and steady and like I said we never raised it to exorbitant numbers so it wasn’t something that is a yoke around our necks.

The TARP is a depending on how you look at it, a three or five year preferred or something like that and so they’re not directly comparable and we’ll eventually repay the TARP and move on when we get through all this and right now you can’t repay the TARP because part of the agreement was that it wasn’t repayable without being replaced.

And you can’t replace that kind of thing in today’s market.


Your next question comes from the line of Mike Mayo - Deutsche Bank

Mike Mayo - Deutsche Bank

Can you talk about the investment bank strategy, are you looking to kind of contract, maintain or expand in absolute terms and relative to peer, are you looking for big market share and the reason I ask it looks like your compensation is only down a little bit year-over-year so are you willing to pay a little bit more to get better talent and get better share.

James Dimon

I think part of the compensation does relate to about what I mentioned about Bear Stearns but, we hope to gain share. But there will always be tough competitors in the investment banking business so I think that the investor side, trading, client trading, we have, it’s hard to tell if we’ve gained share but if you look at surveys in Greenwich and other things and anecdotally it looks like we have. We certainly have in equity trading so we hope to gain share there.

And the investment banking side, covering corporate clients, ECM, DCM, M&A and stuff like that, we’ve gained share. But as you know this is a tough business so we don’t assume that it will be easy going forward. And we’ll keep investing in the parts of the business that we think will grow and obviously there are parts of the business which have changed and you kind of disinvest a little bit and that would be in areas you know about, parts of the securitized products, some structured products, etc. where you’re just not going to have the volumes you had before.


Your next question comes from the line of Meredith Whitney - Oppenheimer

Meredith Whitney - Oppenheimer

Just to make sure I’m clear, your unemployment expectation now is 7.5 to 8%?

James Dimon

I mentioned that relative to card. But I think it’s fair to say in my opinion is the minimum you’re going to see. That’s an opinion though, that’s not built into every number we do. So that’s just an opinion.

Meredith Whitney - Oppenheimer

But do you have a number like you clearly went through in terms of your severity expectations, do you have a number embedded generally in your assumptions for loss reserves?

James Dimon

I think the answer is, well loss reserve is a different thing which is looking forward and projecting forward and yes, we do assume some deterioration in that which assumes higher in general, home prices going down, unemployment going up.

But it is not a direct correlation. I agree with you it will drive those things, but these are just estimates and models so common sense tells you it’s going to get worse and we should be prepared for that.

Meredith Whitney - Oppenheimer

Getting back to expenses and highlighting on the stuff that you talked about with the investment bank, given the fact that it is such a large percentage of your overall cost structure and the environment is so different and the business is going in such a different direction, how do you resize that business and a larger question is you guys are the poster children for realigning so many businesses, integrating so many businesses, how long do you imagine the restructuring of the core expense structure within the banking industry takes and that’s important to relending of course.

James Dimon

So the investment bank, obviously a lot of the change you see taking place in the investment bank, I think Steve Black and Bill Winters have been pretty aggressive in resizing and responding to the environment. What we don’t want to do is over react and not do a good job servicing our clients. So job number one is to make sure that we’re in the market servicing the client, trading, calling on clients, and so we’re not going to over react to that, we don’t think those businesses are going to go away.

Like I said, I think we think some of them are. I think the way you look at it and I don’t have the headcount numbers in front of me, but when we added Bear Stearns, we said it would add about 6,000 people to the IB net. I think the headcount looking forward is going to be more like as if you didn’t add Bear Stearns at all.

So we’ve probably eliminated some how in all the things we do another 6,000 jobs and that will come also down during the course of the year as some of the plans we put in place are implemented.

Meredith Whitney - Oppenheimer

Given change, given the fact that obviously everyone is looking to monetize and get as much capital to their core franchise as possible, do you have additional spare parts divestitures, and conversely do you have appetite for spare parts acquisitions, meaning a prime broker that comes available, I’m just throwing out situations, but can you comment on that?

James Dimon

Acquisitions, we would never say never, but obviously we’re busy with Bear Stearns and WaMu, both of which we think are important to do and to do right so the hurdle rate would be really high to do an acquisition. The price would have to be really good, the ability to execute unquestionable, and the business logic unquestionable.

So we’re not out there looking, if that happens obviously we’ll think about it over time and the second one, divestitures, there’s nothing on the table that we plan to divest.


Your next question comes from the line of Nancy Bush – NAB Research

Nancy Bush – NAB Research

You spoke about bringing down deposit costs in the WaMu franchise, can you just tell us sort of how generally you’re doing that, are you doing it by product, or by region and what has the reaction been?

Michael Cavanagh

I think we’ll get deeper into it in terms of Investor Day but as you know the need to hold deposits was causing WaMu to be a price leader on particularly time deposits but really across the board so as we’ve modeled the deal and as Charlie and team are actually executing, we’re looking to just bring pricing, state by state, region by region, into better line with the way we would do it in Chase markets in terms of the company’s overall cost of money with a view to the local market conditions.

So anywhere state by state we both look at overall cost of money to the company together with franchise value when we price money.

James Dimon

Hot money, we’re attracting some hot money. We don’t need it.

Michael Cavanagh

So despite that we’re doing an okay, but keeping total balances pretty flat to where they were with some churn away from fast money.

Nancy Bush – NAB Research

Can you just give us your very rough impression in the quarter of whether the pricing reductions at WaMu, how much they kicked in to NIM or took away from NIM?

Michael Cavanagh

What I would point you to is on the retail side, you can see it’s imbedded in here but it’s part of the impact of overall deposit margin in the retail business which stayed around a 3% type of level.

James Dimon

And within what we kind of expected because we knew we were going to do some of that and obviously the changes in the rate curve and the deposit costs, but net net is all probably a wash.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Michael Cavanagh

Thank you very much everybody, look forward to talking to you next quarter.

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