SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: January 31, 2001 Commission file number 1-5805
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J.P. MORGAN CHASE & CO.
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(Exact name of registrant as specified in its charter)
Delaware 13-2624428
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
270 Park Avenue, New York, NY 10017
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(Address of principal executive offices) (Zip
Code)
(Registrant's telephone number, including area code) (212) 270-6000
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Item 5. Other Events
The following statements are based on expectations of management of J.P. Morgan
Chase & Co. ("JPMC") as of January 30, 2001 and confirm certain statements made
by JPMC's management at a public investor presentation held on January 17, 2001.
Management of JPMC does not undertake to update these statements to reflect the
impact of circumstances or events that arise after that date.
These statements are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995, and are subject to significant risks
and uncertainties, as described below. Actual results may differ materially.
Business Outlook
Merger Outlook: The merger integration process is both ahead of schedule and
working extremely well. Based on integration efforts to date, management of JPMC
currently estimates merger synergies will amount to approximately $3 billion
(pre-tax), comprised of approximately $2 billion of expense savings and
approximately $2 billion of incremental revenues (assuming a return to market
conditions similar to that experienced during the second and third quarters of
2000), less approximately $1 billion of expenses associated with the incremental
revenues. One-third of the synergies are anticipated to be achieved by the end
of 2001, with the remainder anticipated to be achieved by the end of 2002. In
addition, management estimates that JPMC will incur approximately $3.2 billion
(pre-tax) of one-time expenses in connection with the merger. JPMC took a charge
of $1.25 billion at December 31, 2000 for merger-related costs. The balance of
the estimated one-time costs will be expensed over 2001 and 2002. Nearly
one-half of the merger expenses will be related to employee severance and
compensation costs, while the remainder are expected to be related primarily to
technology, systems-integration and facilities costs.
Management expects approximately 5,000 job eliminations will result from the
merger. The majority of the front office eliminations will be effected by the
end of the first half of 2001, and eliminations affecting back office and staff
personnel will commence during the second half of 2001.
Management anticipates that Chase Securities Inc. and J.P. Morgan Securities
Inc., JPMC's two principal broker-dealers, will merge on or about April 1, 2001
and that The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York,
JPMC's two principal New York banks, will merge on July 14, 2001.
Expense Management: Management of JPMC is targeting cash operating expenses for
full year 2001 to be flat on a year-over-year basis with full year 2000 (pro
forma including expenses of Robert Fleming Holdings Inc. ("Flemings") for full
year 2000). Cash operating expenses for JPMC, pro forma including cash operating
expenses of Flemings, but excluding cash operating expenses of J.P. Morgan
Partners, JPMC's private equity investment business ("JPMP"), was approximately
$21.5 billion in 2000. Cash operating expenses for JPMC, pro forma including
cash operating expenses of Flemings and JPMP, were approximately $21.9 billion
in 2000.
Credit Risk Management: At December 31, 2000, approximately 68% of JPMC's total
commercial credit exposure, including derivative and foreign exchange
investments, was deemed to be investment grade by management. Commercial net
charge-offs for 2001 are expected to fall within the targeted range of 40-60bp
of JPMC's commercial loan portfolio.
Consumer net charge-off ratios are expected to be at approximately the same
levels for full-year 2001 as full-year 2000, although there is expected to be a
normal seasonal increase in credit card net charge-offs in the first quarter of
2001.
JPMC management believes that deteriorating credit conditions in the United
States will cause nonperforming assets to increase in 2001. However, given the
diversity of the credit profiles of each of the two heritage companies and the
longstanding commitment of The Chase Manhattan Corporation to originate for
distribution, management believes that JPMC's credit performance will continue
to be better than the industry average.
Capital Management: Management believes that, in the future, JPMC's revenues
will be more dependent upon fee-generating businesses, such as asset management
and mergers and acquisitions advisory activities, and less dependent upon
balance sheet growth. In addition, as a result of balance sheet synergies
anticipated to be realized over the first year following the merger, management
expects JPMC's balance sheet to be reduced by approximately $35 billion in
nominal assets, or $8 billion in risk-weighted assets, as compared with
aggregate assets of the two predecessor corporations' balance sheets, absent the
merger. These balance sheet synergies are expected to create more than $600
million of free capital in the first year following the merger. Management's
long-term target range for JPMC's Tier 1 Capital ratio is 8.00%-8.25%.
Financial Performance Goals:
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JPMC has targeted its financial performance goals over time as:
o revenue growth of 10-12% per year
o cash return on equity of 20-25%
o growth in annual cash earnings per share of 15%
Lines of Business Outlook:
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The business outlook for 2001 for JPMC's various lines of business is as
follows:
Investment Bank: The Investment Bank has targeted moderate revenue growth for
2001; for these purposes, financial market activity in 2001 is assumed to be at
levels only moderately higher than the fourth quarter of 2000. The Investment
Bank intends to be heavily focused on reducing its expenses in 2001, primarily
as a result of reductions in headcount and incentive compensation. As a result,
the Investment Bank has targeted an overhead ratio of 60% by year-end 2001.
Private Equity: JPMC believes JPMP's private equity investment business will
continue to create value for JPMC, making substantial contributions to JPMC's
earnings over time. Since JPMP's inception in 1984, the compound annual cash
return on JPMP's investments has been approximately 43%. JPMC has not and is not
considering an exit of the private equity business and does not intend to spin
off JPMP as a separate entity nor to issue a separate tracking security.
However, given the volatile nature of the public equities markets, and that of
the NASDAQ market in particular, JPMP's reported private equity returns may
include significant unrealized valuation adjustments, both favorable and
unfavorable, for any given period. JPMC makes no assumptions about unrealized
gains or losses that may be experienced by the JPMP portfolio. However, JPMC
management is targeting realized cash earnings of JPMP for 2001 consistent with
cash realized earnings of JPMP for the past several years.
JPMC intends to commit approximately $2 billion of its own capital for
investment by JPMP in 2001, and approximately $1.5 billion of its own capital to
JPMP in each of the following four years. However, as a result of planned sales
over the next several years to third parties of interests in certain of JPMP's
investments, JPMC's proportional share ownership of investments made and to be
made by JPMP in the future may be reduced.
Treasury & Securities Services: Management expects JPMC's Treasury & Securities
Services business to continue its revenue growth for 2001 at approximately the
same rate as experienced in 2000. Expense management will continue to be a
focus, and management of JPMC has targeted an overhead ratio, over time, in the
mid-60% range for the business.
Retail & Middle Market Banking: Management is targeting double digit income
growth for Retail & Middle Market Banking for 2001. In order to meet this
target, business operations will be reorganized, resulting in total
restructuring charges of approximately $90 million, of which approximately $75
million will be incurred in 2001.
Important Factors That May Affect Future Results
All forward-looking statements, by their nature, are subject to risks and
uncertainties. JPMC's actual future results may differ materially from those set
forth in its forward-looking statements set forth above.
The following discussion sets forth certain risks and uncertainties that JPMC
believes could cause its actual future results to differ materially from
expected results. However, other factors besides those listed below could also
adversely affect JPMC's results and the reader should not consider any such list
of factors to be a complete set of all potential risks or uncertainties. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
Merger of Chase and J.P. Morgan. JPMC may fail to realize the growth
opportunities and cost savings anticipated to be derived from the merger of The
Chase Manhattan Corporation ("Chase") and J.P. Morgan & Co. Incorporated
("Morgan"), which was effective as of December 31, 2000. If JPMC is not able
successfully to combine the businesses of Chase and Morgan and achieve its
objectives, the anticipated benefits from the merger may not be realized fully
or at all or may take longer to realize than expected. For example, it is
possible that the integration process could result in the loss of key employees,
the disruption of ongoing businesses or inconsistencies in standards, controls,
procedures and policies that could adversely affect JPMC's ability to maintain
relationships with employees, clients or suppliers.
Business Conditions and General Economy. The profitability of JPMC's investment
banking, trading and securities services businesses and retail and middle-market
banking businesses could be adversely affected by a worsening of general
economic conditions in the United States or abroad. Factors such as the
liquidity of the global financial markets, the level and volatility of equity
prices and interest rates, investor sentiment, inflation and the availability
and cost of credit could significantly affect the activity level of clients with
respect to size, number and timing of transactions effected by JPMC's investment
banking business, including its underwriting and advisory businesses, and may
also affect the realization of cash returns from JPMC's private equity business.
Such factors will also affect trading market conditions in domestic and foreign
securities and the revenues derived from the mark-to-market values of certain of
JPMC's businesses, including JPMP. An economic downturn or significantly higher
interest rates could adversely affect the credit quality of JPMC's on-balance
sheet and off-balance sheet by increasing the risk that a greater number of
JPMC's customers would become delinquent on their loans or other obligations to
JPMC. Further, a higher rate of delinquencies by customers or counterparties
would result in a higher level of charge-offs and a higher level of provision
for JPMC, which could adversely affect JPMC's income. See also "Factors
Affecting Allowance for Credit Losses" below. In addition, a higher level of
domestic or foreign interest rates or a downturn in trading markets could affect
the amount of assets under management by JPMC (for example, by affecting the
flows of moneys to or from the mutual funds managed by JPMC) and impact the
willingness of financial investors to participate in loan syndications and
underwritings managed by JPMC.
Competition. JPMC operates in a highly competitive environment and expects
various factors to cause competitive conditions to continue to intensify. For
example, technological advances and the growth of e-commerce have made it
possible for non-depository institutions to offer products and services that
were traditionally banking products and for financial institutions to compete
with technology companies in providing electronic and internet-based financial
solutions. In addition, investment banks and insurance companies are
increasingly competing in traditional banking businesses, such as syndicated
lending and consumer banking, and banking institutions are continuing to
diversify their financial products and services into non-traditional areas. JPMC
expects this cross-industry competition to continue to intensify, particularly
as continued merger activity produces larger, better-capitalized companies that
are capable of offering a wider array of products and services.
Foreign Operations; Trading in Foreign Securities. JPMC does business throughout
the world, including in developing regions of the world commonly known as
emerging markets. JPMC's businesses and revenues derived from foreign operations
are subject to risk of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies or policies of central banks, expropriation, nationalization,
confiscation of assets and changes in legislation relating to foreign ownership.
JPMC also invests in the securities of corporations located in foreign
jurisdictions, including emerging markets. Revenues from the trading of foreign
securities may also be subject to negative fluctuations as a result of the above
factors. The impact of these fluctuations could be accentuated because,
generally, foreign trading markets, particularly in emerging markets countries,
are smaller, less liquid and more volatile than U.S. trading markets.
Operating Risk. JPMC, like all large corporations, is exposed to many types of
operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees or operational errors, including clerical
or recordkeeping errors or errors resulting from faulty computer or
telecommunications systems. Given the high volume of transactions at JPMC,
certain errors may be repeated or compounded before they are discovered and
successfully rectified. In addition, JPMC's necessary dependence upon automated
systems to record and process its transaction volume may further increase the
risk that technical system flaws or employee tampering or manipulation of those
systems will result in losses that are difficult to detect. Although JPMC
maintains a system of controls designed to keep operating risk at appropriate
levels, JPMC has suffered losses from operating risk and there can be no
assurance that JPMC will not suffer losses from operating risks in the future.
Government Monetary Policies and Economic Controls. JPMC's businesses and
earnings are affected by general economic conditions, both domestic and
international. JPMC's businesses and earnings are also affected by the fiscal or
other policies that are adopted by various regulatory authorities of the U.S.,
foreign governments, and international agencies. For example, policies and
regulations of the Federal Reserve Board influence, directly and indirectly, the
rate of interest paid by commercial banks on their interest-bearing deposits and
may also impact the value of financial instruments held by JPMC These actions of
the Federal Reserve Board also determine to a significant degree the cost to
JPMC of funds for lending and investing. The nature and impact of future changes
in economic and market conditions and fiscal policies are not predictable and
are beyond JPMC's control. In addition, these policies and conditions can impact
JPMC's customers and counterparties, both in the U.S. and abroad, which may
increase the risk that such customers or counterparties default on their
obligations to JPMC.
Factors Affecting Revenues. JPMC's management categorizes the revenue components
of JPMC's operating earnings as either market-sensitive revenues or less
market-sensitive revenues. Market-sensitive revenues are affected by many
factors, including JPMC's credit standing and its success in proprietary
positioning, volatility in interest rates and in equity and debt markets, and
the economic, political and business factors described above. JPMC anticipates
that its market-sensitive revenues will experience volatility from time to time
as a result of these factors. Management also expects that less market-sensitive
revenues will experience fluctuations from time-to-time. Less market-sensitive
revenue, will be affected by JPMC's loan growth (which is dependent upon the
economic conditions described above, as well as upon discretionary decisions as
to whether securitize, sell, purchase or syndicate loans or loan portfolios),
and by JPMC's ability to grow its fee-based businesses (which are affected by
pricing and competitive pressures, as well as by the costs associated with the
introduction of new products and services and the expansion and development of
new distribution channels).
Factors Affecting Allowances for Credit Losses. JPMC's allowances for credit
losses are intended to cover probable credit losses inherent in the credit
extension process for loans and lending-related commitments. Each of the
components of the allowances for credit losses is based upon management's
estimates of probable loss from various segments of the portfolio. Estimating
losses is inherently uncertain. The estimation process assumes that past
experience is a valid indicator for estimating prospective losses, which may not
always be the case. The accuracy of estimates reflected in the allowance may be
affected by a number of factors, ranging from external macroeconomic factors to
limitations inherent in the estimation methodology itself. These factors
include, among others: general economic and political developments; structural
changes that may affect particular industries; currency devaluations that may
affect cross-border exposures; changes in underwriting standards; legal and
regulatory requirements affecting reserving practices; the volatility of default
probabilities, rating migrations and loss severity; and the quality of available
data.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
J.P. MORGAN CHASE & CO.
(Registrant)
By: /s/Marc J. Shapiro
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Marc J. Shapiro
Vice Chairman, Finance,
Risk Management and Administration
Dated: January 31, 2001