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MANAGEMENT

DISCUSSION

SECTION

Operator:

Good

morning.

Welcome

to

JPMorgan

Chase

third

quarter

2009

earnings

conference

call.

I

want

to

now

turn

the

call

over

to

Mike

Cavanaugh,

CFO

of

JPMorgan

Chase.

Please

go

ahead,

sir

Michael

J.

Cavanagh,

Chief

Financial

Officer,

and

Executive

Vice

President:

Great.

Hey,

good

morning,

everybody.

Thanks

for

joining

Jamie

and

I.

We'll

go

through

the

usual

slide

presentation

that's

available

on

the

web.

I

just

refer

you

to

slide

20

which

gives

the

usual

forward

‐

looking

comments

disclaimers

for

read

at

your

own

leisure,

and

with

that,

let

us

get

started

on

the

overall

results

on

slide

one.

The

highlights

here

so

we

had

$3.6

billion

of

net

income

in

the

quarter.

That's

earnings

per

share

of

82

cents

on

revenues

of

$28.8

billion.

I

won't

spend

too

much

time

talking

about

where

the

results

came

from

here

because

we'll

go

through

it

business

by

business,

but

obviously

it

was

great

strength

in

the

investment

bank

and

strong

performance

in

the

asset

management

commercial

bank

and

retail

banking

businesses

as

well

as

very

strong

results

in

our

corporate

investment

portfolio.

The

backdrop

is

credit

cost

remain

elevated

and

you

will

see

that

by

line

of

business,

various

degrees

of

flattening

and

charge

‐

offs

are

slowing

the

pace

of

increase

but

nonetheless,

continue

to

be

at

very

high

levels.

We

added

$2

billion

to

the

consumer

credit

reserves,

though

to

bring

the

total

credit

reserves

to

$31.5

billion

which

is

a

very

strong

number

both

for

the

firm

and

each

line

of

business.

I'll

point

that

out

as

we

go

through.

Overall

reserve

to

loans

for

the

firm

of

5.3%.

Capital,

very

proud

of

the

capital

levels

of

the

company.

Tier

1

common

throughout

retention

of

those

earnings

grows

through

$100

billion

to

101

with

a

tier

1

common

ratio

then

of

8.2%

and

tier

1

capital

ratio

of

10.2%.

Obviously,

very,

very

strong

capital

levels.

Slide

2

has

everything

I

just

described

on

it.

So

I'm

going

to

skip

that

and

take

us

to

slide

3,

the

investment

bank.

So

here

let's

walk

through

the

results

in

the

investment

bank.

You

can

see

the

circled

number,

net

income

of

$1.9

billion

of

revenues

of

a

$7.5

billion

of

the

business

overall.

I'll

just

make

one

clarifying

statement

up

front

that

a

cup.

The

items

that

you

all

have

been

focused

on

in

the

past

together

had

an

immaterial

impact

on

the

overall

profit,

it's

a

combination

of

two

items.

One

is

the

tightening

of

credit

spreads,

spreads

on

JPMorgan's

name

and

counterparty

names,

DBA/CBA

it's

known,

together

for

a

modest

net

negative,

and

then

we

had

gains

of

approximately

$400

million,

mostly

realized

on

those

legacy

leveraged

lending

and

mortgage

positions,

mostly

leverage

loans.

So

moving

through

with

putting

that

aside,

let's

move

through

the

underlying

real

dynamics

of

the

business.

So

investment

banking

feline,

$1.7

billion,

up

a

bit

year

over

year

and

obviously

off

some

from

the

record

quarter

that

we

had

last

quarter,

second

quarter

where

we

booked

something

like

2.2

billion

of

investment

banking

fees.

We

maintained

the

number

one

year

‐

to

‐

date

rankings

across

all

the

major

capital

raise

in

categories

so

the

investment

banking

franchise

is

doing

quite

well

and

continues

to

do

so.

The

fixed

income

markets

line,

revenues

of

$5

billion,

and

that

obviously

has

those

gains

on

leveraged

loans

that

I

talked

about

bringing

the

total

value

of

the

leveraged

loans

carried

on

the

books

down

to

a

market

value

of

$2.2

billion

or

carried

it

at

about

less

than

40

cents

on

the

dollar.

That's

a

26%

reduction

from

last

quarter,

so

we're

likely

not

to

be

talking

about

that

any

more

from

this

stage.

And

then

strong

performance

across

most

of

the

other

products

really

in

the

fixed

income

markets

area.

Equity

markets,

similar

story.

$941

million

worth

of

revenues

in

equity

markets,

particular

strengths

ongoing

in

the

prime

services

segment

there.

Last

thing

I'll

comment

on

in

the

investment

bank

is

credit

costs.

You

see

credit

costs

of

$379

million

over

on

the

left

and

the

explanation

there

is

that

is

charge

‐

offs

of

$750

million,

partially

offset

by

release

in

allowance

related

to

particular

loans

that

are

marked

down

in

the

quarter

for

which

we

previously

held

our

marks

in

the

form

of

reserves,

such

as

the

geography

swing

leaving

us

with

well

marked

on

a

net

basis

between

reserves

and

marks

on

those

loans.

That

was

a

release

of

371

to

get

to

you

the

379

net

number.

Overall,

though,

leaves

us

with

8.4%

at

the

end

of

the

quarter

of

reserve

to

loans

there.

Moving

on

to

retail

financial

services.

On

the

next

slide,

some

of

the

drivers

here,

top

half

of

the

page

is

the

deposit

‐

taking

side,

the

retail

bank.

Here

as

we

said,

I'll

just

point

you

to

the

circled

number,

average

deposits,

339.6

billion

up

obviously

versus

a

year

ago.

Given

Washington

Mutual

transaction

at

this

time

a

year

ago

and

declined

as

expected

by

about

$8

billion

from

last

quarter

as

we

let

high

cost

Washington

Mutual

CDs,

one

‐

year

CDs

are

rolling

off

mostly

in

the

third

and

the

fourth

quarter

coming

up.

Everything

else

in

the

branch

production

side

we

still

have

underlying

good

growth

in

the

retail

banking

franchise.

We

are

inclusive

of

WaMu

and

WaMu

as

well

and

the

WaMu

integration

continues

to

go

quite

well

with

the

last

conversion

happening

in

a

couple

of

weeks

here.

So

everything

is

healthy

and

on

track

in

the

retail

bank.

Consumer

lending

side

down

at

the

bottom

of

the

page,

total

firmwide

originations

and

renewals

of

credit

totaled

about

$140

billion

in

the

quarter

and

46

billion

of

that

is

what

you

see

down

in

the

bottom

of

this

page

in

the

retail

side.

That's

37

billion

or

so

of

mortgage

loan

organizations,

about

flat

year

over

year

and

down

a

bit

quarter

over

quarter.

Remember,

the

real

dynamic

in

that

business

is

our

exit

of

broker

‐‐

the

brokerage

channel

in

the

past

12

months

helping

drive

some

of

those

numbers,

replaced

by

activity

more

directly

originated

by

ourselves,

and

then

exit

auto

originations,

you

see

about

$7

billion

of

auto

originations.

We've

done

well

in

terms

of

market

share

in

that

business

on

the

prime

side

and

particular

strength

this

quarter

with

the

cash

for

clunkers

program.

So

moving

to

the

next

slide,

slide

5,

for

the

income

statement

for

retail

financial

services,

we'll

just

take

this

in

two

pieces.

So

if

you

see

in

the

middle

of

the

left

‐

hand

side

the

retail

bank

on

revenues

of

about

$4.6

billion,

up

substantially

from

a

year

ago

given

Washington

Mutual

in

particular.

We

had

profits

of

a

$1.043

billion

in

the

quarter.

Very

profitable

in

retail

banking

consistent

enough

with

a

little

bit

of

last

quarter

and

then

the

other

side

of

RFS

is

consumer

lending

at

the

bottom

of

the

page

and

driven

by

the

very

high

level

credit

costs

that

I'll

go

through

in

the

next

slide

of

$3.8

billion,

which

includes

some

additions

about

1.4

additions

to

loan

loss

reserves.

We

ended

up

having

an

after

‐

tax

loss

of

about

a

billion

dollars

in

consumer

lending.

So

moving

to

the

slide

on

the

credit

portfolios

in

home

lending,

let

me

just

talk

through

that

for

a

second

so

here

slide

6

this

is,

I

will

just

start

on

the

upper

left

with

some

the

overall

commentary

here.

So

as

we

said

last

quarter

and

then

a

month

ago

at

a

conference,

we

continue

to

see

initial

signs

of

stability

in

the

early

bucket

delinquency

trends

where

we're

just

not

ready

to

declare

that's

a

sustained

trend,

but

it

is

continuing

to

be

what

we

actually

observe.

Another

overall

comment

is

that

as

far

as

the

impact

of

foreclosure

moratorium,

the

trial

mods

which

we've

been

active

in

doing

and

just

the

overall

extension

of

processing

of

REO

through

the

courts,

those

things

are

obviously

having

an

affect

on

overall

delinquency

percentages

and

stats

but

just

wanted

to

make

it

clear

that

we're

doing

everything

we

can

to

stay

on

top

of

the

income

statement

taking

recognizing

losses

through

charge

‐

offs

and

adding

to

reserves

without

regard

for

the

impact

that

those

factors

would

be

causing

the

overall

delinquency

stats.

So

with

that

moving

over

to

the

left

‐

hand

side,

you

can

see

the

actual

charge

‐

offs

for

the

quarter

in

the

circle

there.

That

totals

up

to

about

$2.1

billion

this

quarter

across

these

three

portfolios

down

a

touch

from

last

quarter.

So

charge

‐

offs

themselves

actually

stable

quarter

over

quarter

but

obviously

at

a

very

high

level,

which

is

driving

the

business

to

the

after

‐

tax

losses

we

saw.

On

the

right

‐

hand

side

then

in

outlook,

I

won't

go

through

these

piece

by

piece,

but

it's

unchanged.

Looking

ahead

to

what

we

see,

we're

not

changing

any

of

these

numbers

and

obviously

whether

we

advance

to

these

levels

is

going

to

be

a

function

of

whether

some

of

the

early

bucket

delinquency

trends

that

we

described

to

continue

or

not,

and

then

the

final

and

important

point

on

the

purchase

credit

impaired

loans

we

acquired

from

Washington

Mutual,

about

$150

billion

or

so

that

we

wrote

down

by

$30

billion

through

SOP033,

at

the

time

we

did

the

transaction,

overall

that

portfolio

is

behaving

in

aggregate

as

we

expected,

but

we

measure

impairment

at

subportfolio

levels

for

purposes

of

account

impairments

and

so

as

we

look

at

the

prime

portfolio

nonoption

ARMs,

just

the

prime

mortgage

portfolio,

we

see

some

weakness.

We

obviously

measure

that

in

terms

of

expected

lifetime

losses

on

that

portfolio

and

have

added

$1.1

billion

that

is

put

on

the

books

in

the

form

of

loan

loss

reserve

as

opposed

to

incremental

mark.

So

that

is

1.4

billion

‐‐

$1.1

billion

over

the

1.4

billion

over

the

loan

loss

addition

in

RFS

or

consumer

lending

in

the

quarter.

So

with

that,

moving

on

to

card

services

on

slide

7,

you

see

as

expected

and

unfortunately,

a

loss

of

$700

million

in

the

quarter.

That

is

fully

driven

by

the

continued

elevated

credit

costs,

high

credit

costs

in

the

quarter.

Basically

coming

in

consistent

with

what

we

talked

about

last

quarter

so

the

charge

‐

off

rates

on

the

Chase

portfolio,

the

legacy

Chase

portfolio

versus

as

opposed

to

the

runoff

WaMu

subprime

portfolio,

Chase

portfolio

is

9.41%.

Charge

‐

off

rate

circled

there

down

at

the

bottom

on

the

left

up

from

897

last

quarter

by

turning

toward

the

10%

plus

or

minus

that

we

talked

about

last

time

and

we

were

ahead

by

the

end

of

the

year.

Let

me

get

to

outlook

commentary

in

a

minute

and

we

bolstered

reserves

here

by

about

$600

million.

On

the

revenue

side,

the

dynamics

here,

we

continue

to

see

end

of

period

outstandings

circled

at

144

billion,

trending

lower

from

a

year

‐

ago

in

last

quarter

and

that's

the

factors

that

we

talked

about

before,

backing

away

from

balanced

transfer

business

on

our

and

part

in

the

marketing

side

together

with

lower

actual

consumer

spend

on

our

cards

and

lower

charge

volume

big

driver

‐‐

[

Audio

difficulty

]

In

the

security

service

side

and

the

custody

and

investor

services

business

and

that's,

you

know,

Abating

levels

of

activity

in

securities

lending

business

together

with

overall

and

have

that

in

that

business.

A

disappointing

revenue

decline

in

WSS,

CS

down

a

little

bit

on

the

revenue

side

and

that

drives

the

overall

profit

number

of

about

$300

million

in

the

business.

Asset

management

on

slide

10,

net

income

here

of

$430

million,

up

year

over

year,

23%

on

revenues

of

$2.1

billion

which

are

up

6%

year

over

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