摩根大通 (JPM) 2001 Q1 法說會逐字稿

00.00 Okay, everybody will take their seats and we will go ahead and get started and I want to welcome those of you who are on the phone and on the web, as well as those of you who are on the audience today. We have had an interesting quarter and I think a bit harder in a challenging environment as these are usual formats and Dina Dublon, Chief Financial Officer will give you a brief run through of our interpretation of the results and I will make some additional remarks and then I will be joined by several of my colleagues in responding to your questions. Dina 00:00 38

Hi. Good morning everybody, those of you on the phone, those of you in the room. Okay, we will leave it here for a moment longer than usual. This is our statement regarding possible risks and uncertainties in accordance with the Private Securities Litigation Reforms Act. Okay. So what is behind the consolidative results for the quarter? Both equity partners and investment management continue to have weak performance this quarter, tied directly to the level and activity in the equity market. Our other businesses performed well in a more challenging environment, all of them with returns on equity in excess of 20%. Merger execution means that we are lowering expenses and we are doing it without losing the focus on the client. We are gaining share. Here is the trend in cash operating income over the last five quarters. In the fourth quarter, it was less than half the level in the first quarter of last year. It substantially rebounded in the first quarter this year. The first line shows operating earnings per share at $0.70 a share. We then break down the impact on earnings per share of both JP Morgan partners and amortization. We believe that the contributions of equity partners to the value of JP Morgan-Chase is not just a multiple of negative, or for that matter, positive earnings. So we separate it out. Internally, we separate the results of the pure investing business from the operating businesses to gauge how well we are managing. We also add that amortization of intangibles to get to operating results, which we believe are more meaningful to investors. On this basis, operating earnings per share at $0.80 is 11% lower than the record first quarter last year. 00:3:12

For the first quarter, we had gains of $130 million compared to $650 million in the first quarter last year. Realized gains remained level at about $400 million. Unrealized gains and losses have been the cause for volatility in the bottom line. The strongest sectors for realized gains in the quarter were energy and power, which speaks for the diversity of our investment style. Unrealized losses of $280 million are primarily driven by write-downs in private investment. We have completed a thorough review of the portfolio in February and March. Post review, the private portfolio is carried at $9.3 billion versus a cost basis of $9 5 billion. This is a very well diversified portfolio, which will, over time, produce significant earnings for the firm. Public securities, a smaller piece of the total, are still at a substantial premium, or two times costs. Private equity market conditions deteriorated in the first quarter, depressed market valuations, and a difficult financing environment. Today, on the other hand, we are seeing well-priced investment opportunities. When markets stabilize, exit opportunities will become more evident. 00:4:45 Investment management and private banking was also significantly impacted by the equity market. This is not a pretty picture. The negative impact is heightened in comparison with the first quarter of 2000, where strong markets produced record results in Flemings and H&Q Brokerage. That is where the decline is concentrated. Asian Investment Management as well as New Economy Private Wealth Management were both dramatically less productive than a year ago. Assets, under management of $608 billion are down 5% since the end of the year. So what is it that we can say that is positive about the business in this environment? I guess first, in a difficult market, our equity mutual funds have not had net outflow. Mutual fund assets were up because of strong inflows in too many market funds. We are focussed on expense management, we have taken head counts down in the private banks at 10%, and we are reassessing expense targets for the year. 00:5:58 Finally, merger integration process means that the organization is complete, cross-selling potential is well established, though we will have a longer lead time for showing it in the bottom line. It is difficult under current marketing conditions to expect rows in the top line. When markets rebound and they will - we will have achieved significantly better operating leverage as we continue to manage expenses. 00:6:28 Investment Bank. We had good performance there, relative to the market and relative to competitors. Compared to the fourth quarter, revenues are up 20%. Income and return on equity doubled to 22%. The overhead ratio improved from 76% in the fourth quarter to 60% this quarter, the best in the industry. Compared to the record first-quarter last year Pro forma for Flemings, revenues are down 7% and income is down 14%. It reflects our business mix being more weighted towards fixed income, and it is just beginning to show our progress in gaining share. Trading revenues are only slightly down from the first quarter, with very strong results in global derivatives. Investment banking fees are down 24% in a market where MNA volumes and equity activity have dropped 60% or more. Strong performance in loan syndication and bond underwriting help here relative to competitors. With slower markets, we are focussed on expense management beyond the planned merger savings. We are selective and cautious on where we take cuts. We continue to invest and upgrade our cash equity business. We are focussed on the clients' strengthening on our key products. And we are merging well, achieving these results as teams come together - in fact, in some cases, we are not yet collocated. If we go for a few examples, we maintain our leadership in syndicated lending, gaining market share to more than double our nearest competitor. In global MNA we moved to #3 from #6. We are #1 in Asia and #1 in Latin America. In US investment gray debt, we continue to gain share and held on to the #2 spot. Not on the slide is our slippage in equity underwriting in the US to #9. This is a difficult market and we have a tougher integration challenge here. Equities have a long lead-time, and we are making good progress to be judged over a long time span. The high quality and breadth of our offerings, I believe, is working. The advisory for Belitten, a Flemings client, or for OUZA a Heritage Chase client, the convertible for Telecom Italia, or equity deals for KPN Mobile, and Heller Financials are examples. The fees on most of these are TBB, which means "to be booked". We are in a difficult market. The rebound in advisory and underwriting, which will take deals in the pipeline to close, may not materialize until later this year.

Treasury and securities services. Revenue growth slowed to 4% from a double-digit phase in the prior years. In the custody, business it reflects the decline in asset values and in institutional trust, the slowdown in structure deals. Treasury services revenues were negatively impacted by lower rates. The business continues to improve operating leverage despite the slowdown in revenue growth. We have 12% growth in income from last year, with a return on equity of 25%. The business has been, and we expect will continue to be, a steadily growing contributor to the bottom line, even though we are more cautious on top-line growth for the remainder of the year. Retail and middle market financial services results were essentially unchanged from the fourth quarter despite the strong seasonal decline in card results from the fourth quarter. Results were almost 30% better than last year. Adjusting for the $60 million charge leased autos last year, results are up 8% despite the sale of our international business. Return on equity was 22%, and the overhead ratio was down to slightly below 50%. Consumer lending drove the growth of setting the impact of lower spreads on higher deposits and much lower electronic broker activity.

In home finance, originations and applications were at double the pace of last year, offsetting lower servicing revenue and net impairment to mortgage servicing rights of about $20 million. With SAS 133, we now hedge with cash securities, reporting intermittent and hedging gains in separate lines. $350 million of the securities gains are related to this business. Credit card outstandings are up 12%. New accounts this quarter are more than double the level that we got in the first quarter last year. Card is the largest driver of revenues and returns in our consumer business. Many of you have focussed on our performance here. As you can see, we have reversed our luck, our fate: new-on-new 1237 revenue growth has now been accelerating for three quarters, reversing the shrinkage of previous quarters. This is a tangible example of leveraging better, more experienced management in cards and patience. The cumulative effect of growing new accounts beginning in the second half of 2000 - larger purchase volume and new fee 00:13:03 programs - are paying off. We have seen an increase in bankruptcy filings, possibly in anticipation of the pending legislation. We are cautious about credit, though we do not expect to see much change in 2001 versus 2000. Overall, for the retail businesses, we are operating in a tougher environment as well, with pressure on deposit spreads 1332 and potentially greater volatility in mortgage. David Coulter continues to target double-digit bottom-line growth for the business this year, still driven by very tough productivity initiative and continued momentum in cards.

Expenses. We are managing expenses: the total is down 3%, with none compensation being down 8% from the fourth quarter. The quarter results do not show the full benefit of the reductions that have taken place; we will see greater impact in the second quarter. Relative to the first quarter, Pro forma for Flemmings, total expenses are down 5%, or $300 million. We are very much on track to achieve flat expenses Pro forma Flemming. Annualizing first quarter brings us to slightly below last year expenses. Our challenge, however, is to do better than flat expenses. Last year, revenues declined; in the quarter revenues are up $700 million with lower expenses, and you see the rebound in the operating margin to $3.1 billion this quarter. Given the current marketing environment, it may be unsafe to rely upon revenue growth from the first quarter level. Consumer and operating services are more predictable. In the investment bank, we may see a take-up, say, in advisory, but we cannot depend on this level of derivatives trading or fixed-income underwriting, which was strong in the quarter. In this environment, we will deliver on expenses that are lower than last year for Pro forma Flemmings. We will be focused on the operating margin keeping three guides. First, we are taking deeper cuts in the front office to right size to a slower market. Two, we are more limited because of merger implementation in our ability to target reduction in technology and operations, so we have less flexibility there. And three, we will be selective and cautious on where we reduce to ensure that we are positioned to fully to recognize the growth opportunities we have in this merger.

Credit Non-performing assets increased to $2.2 billion, a $300 million increase. For our book, to date, this appears to be a somewhat different kind of credit cycle. We have seen more fallen angels, or sudden downgrades, of investment-grade credit. Additions to non-performing have not been the results of leveraged credit; rather, we have a confluence of special events driving the increase in electric utility, asbestos litigation, and a financial services company. Assuming this environment continues, we will have some further increase in non-performing. Commercial credit risk is a much smaller piece of our business and we have pursued it differently than our peer banks. We originate for distribution. You see it in the ratio of non-performing to assets, or the ratio of non-performing to equity, which is much lower for us than for most other banks. You also see it when evaluating the size of commercial charge-offs to pre-tax income. Commercial chargeoff to loans are slightly below the fourth quarter; at 50 basis points, they are within the expected range for our loan portfolio of 40-60 basis points, which continues to be relevant range for the year. We also believe that our credit performance will continue to do better than the industry. In credit cards, we see normal seasonal uptake in chargeoff ratios to 5.05%, but lower than the 5.50% in the first quarter last year.

I want to take a moment to talk about all other. All other, which is not included in the line of business discussion, was unusually large this quarter at a negative, almost $150 million, after tax. _____ 00:18:24 Morgan at $60 million after tax captures the impact again of its full portfolio review and investment writedowns of about $50 million. The remaining portfolio is carried on the books at $119 million. It has some substantial upside and, we believe, quite limited downside risk from here. Other corporate undistributed costs will take some time to clean up. We will see a significant reduction in the second quarter.

Nothing unusual otherwise in the non-operating expenses. The amounts that we have this quarter relate to previously announced merger and restructuring costs. Given the environment, we had a solid quarter, with two businesses impacted by the market and all other businesses doing well in a challenging environment. Credit performance _____ 00:19:26 weaker, is well controlled and better than the most. We have shown this quarter our commitment to expense management and we are very pleased with the progress we continued to make with clients. Thank you. Marc

Marc J. Shapiro Thank you, Dina. I just would like to make a couple of points and then we will open it up for questions.

We are in a difficult environment. I gather that right as we commenced our meeting, the Federal Reserve decided to cut interest rates by 50 basis points, so the Federal Reserve must know that we are in a difficult environment, which is encouraging. But until we see some substantial change in the equity market, I think it is difficult for us to get comfortable with strong revenue increases from the first quarter. Normally, trading is seasonally strong in the first quarter. While we expect some of our other sources of revenue to pick up, it is not yet clear that we will have a sufficient amount - even though we do not know what is going to happen to trading - a sufficient amount to offset what might be a seasonal pattern there. 20:40 That means that we need to be particularly focused on expenses, and we are. The merger presents some opportunities and some constraints, opportunities especially in the front office to deal with things in a merger environment, which is somewhat easier than in a non-merger environment. On the other hand, most of our technology is focused on merger and it is not possible to defer or delay those expenses; we need to go ahead and complete the merger - that is the best long-run cost-saving thing that we can do - and we need to be committed to pushing that ahead. We are on our schedule; we have adjusted the schedule in some ways, but essentially we are progressing extremely well with no client problems and no control problems, and we want to continue to push that through to completion of the bank mergers by the fourth quarter of this year.

The third thing I would say is that our credit and risk management disciplines remain in good shape. While again we are in a difficult market and we have had some uptake in non-performing assets, compared to most of our peers they are substantially lower; that reflects both the fact that we do originate per distribution as primary goal. Our commercial credit exposure today is lower than it was 2 years ago, 3 years ago, 5 years ago, 10 years ago, or 15 years ago. We are not in the business of increasing our credit exposure. We are in the business of arranging credit for our customers, we are good at it, and we will continue to do it, but we do it with a discipline from the marketplace and this has helped has in terms of our overall credit statistics.

Fourth, I would say that the diversity of our businesses is a virtue. We do have a rapidly accelerating retail and middle market businesses. David Coulter has provided a great deal of leadership and focus there and I think the new team that we have in credit card is doing an exceptionally good job, so that we are seeing an improving revenue trend. It is a business where we really have a 22% return on equity, where we have good margins with a 50% efficiency ratio, and I think it is a very good business for us and these kinds of markets demonstrate again why it is so important to us to have diversity in our earnings stream and why that business and its growth prospects are important to us as a company.

Finally I would say that the most important thing that we have seen these last 90 days is that we feel even better of the fundamental thesis underlying our merger today than we did 90 days ago, and in terms of a long-run value created by this company, that is the single most important thing going on. Our thesis is that to win in the wholesale business, the best platform is the one that has the broadest array of product capabilities - leadership product capabilities - and the broadest array of customers. If you can put those two things together, you will have the critical mass that is necessary to produce a sustainable high return on equity in this business. We think we have the best platform to do that. That is not going to be proven in 90 days, not going to be proven even this year, but I think the early returns from our clients are extremely encouraging - whether it is because they are turning to us for key strategic transactions, as in some of the examples that Dina cited, Ouza and Belliton in particular, where our Heritage customers at one part of the firm or another were attracted to the global scale and the global standing of the company, its relationship with other people that were involved in those mergers, and its equity research capabilities, all of which enhance our ability to get these types of transactions.

There is a possible misunderstanding that we do this by throwing credit at people and that we are sort of buying whatever sort of business we can by throwing credit at people. That is not the way we do our business. We are in a business of providing credit. Lucent is a great example of a transaction we would have led as an agent bank if we did not have an equity business, because we are in the business of arranging credit for people. We do it well, we get paid well for it, we have a good return on equity in that business, but having done that and having the capability to do that gives us so much additional clout and relationship with our clients that they will turn to us for other products if we have leadership capabilities in those products. That is the thesis of this merger, and that is the thesis where we feel the best about in terms of coming together and making it work. That is a long-term proposition, as I said, and we think that it is going to create long-term value for this company.

With those comments, what I would like to do now is make the floor available for questions, both in the room and on the phone. We will start over here. 00:25: 51

You had $850 million in trading this quarter. If we compare that to a run rate recently, that might have added, say, 15-20 cents to your earnings. Why when forecasting future quarters should we not assume a quarterly run rate, say 15-20 cents less, and while it is trading so strong? How much proprietary and how much clients?

I am not sure I follow that question. We had $2 billion in trading revenue this quarter. That is about the same as the first quarter of last year, a little bit higher than what we in the second and third quarter, and substantially higher than what we had in the fourth quarter of last year. We have a very diversified trading business. I think I would like to ask Don Layton to comment sort of what the strengths were this quarter and what the outlook is. Don...

Thank you, Marc. With the merger, we have an extremely large diversified operation, spanning everything from equity securities all the way through bonds, loans on a secondary basis, and of course, derivatives and foreign exchange. We are levered on almost of all these markets, but we are a creature of the markets and the opportunities they present. Recently, the fixed-income markets have been most vibrant, whether you are talking about the underwriting in bonds, or derivatives that come from bond issues, or activities people interested in hedging given the uncertainties around the world. This is not an overly US-centric business, and it is heavily overseas as well as the United States involving too many changes in policies in other countries impacted as much as it does here. Foreign exchange actually has been quiet lately and is showing up in numbers, although intra-quarter it has had spurts as announcements and policy actions around the world have occurred. The forecast notion is really not so much how you think we will do but, in the short run, how active you think the markets these things will be, and the good news is that in the year 2000 we seem to have enough economic uncertainties - actions by central banks, including today, around the world - that there seems to be a general tone for a long-term vibrant market with a fair amount of volatility and transactions.

Thank you. I was wondering if you could quantify a little more what you are looking for on expenses. You said that previously you were looking for expenses to be flat, and now you think you can do better than that. Can say how much better you are looking for?

No, because I think it partly depends on how markets are over the rest of the year. A lot of our expenses are incentive compensations that relate to actual revenues, and I think that it would be difficult to predict what exactly it will be. But I think what we are saying is that we are focussed on a right-sizing to where the market is and that we will do better than the previous prediction that we had, which is flat.

When you say front office, is that primarily investment banking? What areas are you thinking of?

The areas that have merged are investment banking and also investment management and private banking. I think the areas that are merging and those are the areas that are under the most revenue pressure, I think are the most likely opportunities.

And if you cut private banking, how do you get growth in that business? If you cut the front office, which presumably is sales people?

Well. I don't know how much we will. I think the merger presents a lot of overlap opportunities where we do have the ability to come together and get economies upscaled. We have also had different approaches to segmentation appliance in that business, and there are certain things that we can work on. May be I will ask Ramon de Oliveira, who runs our investment management and private banking, to talk a little bit about how he sees the merger coming together and also what he sees the prospects are. Ramon...

_____ 00:30:24 look at the investment management and private banking business _____ is really managing client assets in three broad client segments - the institutional side, the retail side, where we have access to the customer base to our third-party sales efforts, and the high net worth side. In the last quarter, the institutional side has held very well and the retail side has also held very well in relation to flows through the money market and activities that we captured, and they were significant. Where we have suffered is really in two areas - and we are really comparing _____ 00:31:01 here, very much what/when happened in 1994-95 environment, if you remember, or even 1997-98 - in the high net worth segment, we have suffered from the decline in brokerage activity, particularly around the core of the Heritage _____ 00:31:20 business. On the retail side, we have suffered - because we run this business globally in the Americas, in Europe and in Asia - we have suffered some dramatic declines in the Nikkei and regional Asian industries that make us Marc down those portfolios.

Our expenses were down 6% down versus the first quarter of last year and 5% versus the fourth quarter. We are going to be able, hopefully, to continue this because we have run into a number of areas of duplication - we have two offices in Palm Beach when we need one, and on and on and on - which enable us to rationalize the front end while we are integrating the back end. I would say that our integration program is going better than expected, I mean you all work in investment companies and know how delicate it is manage investment organization. Our retention across all of our investment engines of key personnel has been close to 100% on all Heritage organizations, which is an indicator we look at as we achieve those expense reductions. Our performance is strong, returns - you know this is an environment where you need to distinguish between returns which are negative and performance versus benchmark for the peer group. This is improving, actually, from a pretty much high level.

And I would cite further examples of integration that are important to us: we are going to roll out our Morgan alliance site to all of the Heritage client organizations this year; this will enable the segmentation work that Marc has talked about. As you know, we have consolidated all the mutual fund families of the complex under the JP Morgan brand name, we have merged the Boards - I am sure you all know how delicate those exercises can be, we have merged all of our third party sales force, and, finally, we have integrated all of the brokerage sales force of H&Q into the private bank. The reason I am mentioning this is it is important in an environment that has changed so dramatically to equip our marketers with more than one product. H&Q was essentially a very successful new-issue technology and secondary sales effort. We now have equipped all of these people with the full array of the Heritage private bank capabilities, and that is insulating us from what is happening.

_____ 00:33:35 the expenses, investment performance, and completing, as we will, the integration program of those Heritage organizations.

Next question.

I was struck by the pretty large securities gains number in the first quarter of $455 billion. Could you discuss the composition of that?

Yes if you look at the segment information that we provide, about $315 million roughly is in the retail banks, really in the mortgage company. As Dina pointed out, before SAS 133, we had a lot of our mortgage servicing with off-balance-sheet hedges, where the increase in the value of those hedges offsetting mortgage impairments was taken directly against that line on our income statement. Under the new formulation, we hedged a lot of it with on-balance-sheet securities, and when we realized the gain on those securities to offset the impairment, it happens to be on two different lines. So, somewhere north of $300 million, although it shows up in the retail part on our segment information, goes to deal with the mortgage company hedging. The institutional bank and the investment bank had securities gains of about $160 million, and I think that was part of their normal postioning and trading and they obviously benefitted from the rate reduction that we were positioned for in the first quarter. I think we will take the first question on the phone.

For our audio listeners, please press "1" followed by "4" to register your question at any time.

Our first audio question is coming from Chet Dixon, Lehman Bros. 3525

Thanks. Good morning. A couple of questions. One, wondering if you talk about the syndicated loan market - the liquidity there, the ease of demand, and the ease of _____ 00:35:40 the loans - and also, does the Federal Reserve cut change your outlook all?

With regard to the syndicated loan market, I think it is one that obviously has become more difficult as more banks reach the conclusion that they need to have either higher profitability or they need to restrict their number of assets that they buy. It is a long evolution over a number of years, really, of broadening that market to mutual funds, insurance companies, and pension funds, and they count the period and increasing percentage of our distribution efforts. I think the bottom-line result is that credit will cost more. It has always been our belief that that is a price that clears the market, and that continues to be our belief - that there is a price that clears the market; it is simply going to be a higher price than it was before. It is also true that in difficult market conditions, being the market leader is more important, and it is both more profitable and more important to clients because they know that the market leader has a better chance of getting transactions done, and I think that is one reason that our market share increased in the first quarter. 003653

What was your second question?

Federal funds...

It is certainly a positive sign that the Federal Reserve is doing that and you would have to think that anything that helps the market and the economy would be good for us. As Don pointed out, a little over a third of our market-making activity is in the US, so we are not totally driven by that, but I think you would have to say that it is positive.

Our next question is coming from Reggie Maddin, Solomon Smith Burney.

Hi! I have a question on private equity. In your 10K you made a pre-Board statement about your expectations for cash gains being, I think you said, similar to last year. Can you talk about liquidity in that business and what gives you the confidence to make that statement?

I am not sure about the statement...the statement being that realized gains would be about the same?

Yes.

I will have to go back and look at that statement, but it would be very rare for us to be in a position for predicting realized gain exactly in any one quarter. I think over the years, there has been a fairly steady progression in terms of realized gains, in keeping with the increase in the level of investment that we have made in that business. It is true that it is a diversified portfolio; our traditional exit in that business before the last couple of years was not the happier market, but it was sale of companies, and in fact several of the realized gains that we had in this quarter resulted from sale of companies. So I think we are headed back to a more traditional mode of operation. Our view is that the business continues to generate above-average rate returns and that over time we will see those returns on the investments we have made over the last several years. I do not know that I will feel comfortable predicting them in any one quarter, although it is true that over the last six or seven quarters they have been reasonably consistent.

Marc, I would like to ask you about both custody business and a follow-on question on asset management. First of all, custody: do you have any information on the custody assets at the end of the quarter? I am curious whether you have any perspective on your ability to about gather flows of custody assets ____ 00:39:49 this quarter. Some other companies seem to be growing despite the depreciation factor. The second part of the question is in Ramon's area, on asset management. It seems like your flows, apart from money market assets, have been fairly flat, and yet a lot restructuring going on there, like consolidating the sales force, seems to promise better growth in the future. How aggressive should we be in expecting a ramp-up of net flow growth and asset management in coming quarters?

Let me ask Ramon to deal with that question first, then I will come back to the custody question.

We are 90 days into this experiment, so to see results in flows immediately would be a little bit too optimistic. We have seen no outflows across the complex on the three segments. These are markdowns. If anything, Europe and the Americas have been positive. Secondly, I would say that the pipeline - remembering that in the institutional business you cannot track this on a quarterly basis because there is a lead time for getting the institutional mandate - those are slightly up, as we can see, in the first quarter. So in answering your question, I would leave it to you as to the aggressiveness of your projections, but I would say that we have seen probably the worst quarter-to-quarter in terms of net of markdowns with flows. Having said that, the pace of recovery, because you will always look at comparing a very vibrant market in the sort of mid_____ 00:41:27 technologies sector and Asia last year over this year, is likely to continue but at a less pronounced rate.

The question was what happened to our custody...?

I do not have right at hand the actual end-of-period custody assets. You should know that we have had no _____ 00:41:54 acquisitions quarter over quarter, so our figures are fewer. The business is dominated in its swing in the value of assets as they go up and down, and please note that we are the largest - it is called global - custodian, meaning cross-border, so it is not just the US market; we have been impacted modestly by Asia in particular, Europe has stood up better. Our client base on the fund manager side is heavily skewed to the biggest funds, where we provide more of the large-scale customized service. So, as you see, their funds flows you will see funds flows. The business has had, in the first quarter, very good numbers, a modest negative impact on what is called the ad valorem fees, i.e. the portion of the revenue that is tied to the asset value. But it is not like the mutual fund business, where it is almost 100% ad valorem fees; it is a moderate percentage. Activity - how much is moving cross-border and generates foreign exchange, securities lending - is just as important as this very factor.

Next question on the phone.

Jim Hampbery of Waterstein 00:43:13

Two questions, please. One is the amortization of the intangibles, why was that down sequentially? Could you just give us an idea of what a good run rate is for the year?

Dina, do you want to comment on that?

We take the first quarter and multiply by four...I think that is a good approximation for the year.

Thank you. And why was it down?

It was not down. If it was down, it was only marginal.

If the accounting rules change, and you are allowed to, or you do not have to, or what part of that amortization is goodwill?

We have not sized that exactly. The largest part of it is certainly goodwill, but I cannot give you an exact answer on that, I know that it will be well over 50%.

Another, a completely unrelated question. Could you talk a little bit about backlogs in MNA? Even though the announced MNA is down quite a bit, you seem to be getting your share of business. Could you just talk about what that backlog looks like versus the end of the year or a year ago, or any other number you want to look at?

Geoff Boisi is here, and I think it will be a good opportunity for him to talk about where we see the business right now.

On the MNA side, as you know, I think the overall market is down something like 62% year to year. Our market share has increased: we went from #6 last year to #3 this year in total volume and end-of-quarter at #2 globally in the world today. I would say that tenor of the business has been this has been a difficult period. We have been very pleased with the progress that we have been making. I think overall transactions - just not in MNA but overall - advisory fees have been trending up in the first quarter, and I would say in the last month they stabilized or a flat total little bit, we are hoping to see another spurt, but one of the reasons why Marc and Dina were giving you the messages they were giving you on the revenue side was because we see right now a bit of a plateauing in terms of the backlog of transactions.

Next question.

I was wondering if you could just kind of broaden that out - all the different products... fixed-income, IPOs, or something?

Let us talk a little bit about equities for a second, because that has been an area you all have a lot of interest in. As was mentioned, it was a tough quarter for everyone. We - I do not know how you will want to look at it - we were involved, were profited from, I think, 27% involvement in all equity and equity-linked activity globally, which frankly is not too bad. I think we were #1 co-managers of IPOs, we are #5 co-manager on a global basis in all equity-related and equity linked-related transactions. We have seen, we had, as Dina mentioned, you know, in a very, very difficult market as we have been seeing some very exciting lead managerships that we have been designated to us that have not been announced. That you will be seeing from us over the course of the next few months, if the markets allow us to do that. I think in the overall underwriting business in the credit side, as you see, we have had a very good share of the business. We think that there is a lot of interest, a lot of discussion going on out there. I would say that overall businesses have leveled out a bit over the last month or so, but there is the tenure of the client interest continues to be very strong. There is a lot of thought provoking transactions being contemplated around the world. When we go outside of the Unites States or European business, this has been a very strong force this past quarter and continues at that pace. I think we are #1 in both, not only syndicated finance, but mergers and acquisitions in Asia. We have had a very significant amount of activity in terms of focus on the equity business in Asia but all around the world. So I would say that, you know, we are cautiously optimistic where, you know, we think that there is no question in our minds, as Marc pointed out, that our clients get this and the inner linkages between the different capabilities we now have are working, and as you see in terms of our market shares, our market shares in almost every category have been increasing with the exception of the lead book runner and equities, which is an important thing to look at. But we tend to look at that business in a broader basis in terms of overall profitability, overall involvement and we are making some, we think, significant headway in that area.

Thank you Jeff. Next question on the phone

Our next question is coming from Ray Wafer, Fraser Consulting.

Hi! Marc I have two questions please, one on the card business. I noticed that the 90 day delinquencies came down a little bit, which I assume is seasonal but tend to add less than a year ago quarter. Could you talk a bit about your outlook for the card credits for the remainder of the year were about approximate to 30 day delinquencies have done and I note that, Dave said that we have done the outlook for double digits earning growth in the consumer business was driven partly by cards. Can you relate that to what sort of credit assumptions you are making, and then my second question is about merging markets and I will comeback to that.

Okay, ____, you are on the phone

They were within the Californian authorities, may be, but we are not getting to him. I think what I would say on the credit card is that we think the outlook is fairly stable in terms of losses. We are a little concerned about the rush to beat the new bankruptcy law and what impact that could have. You have to be somewhat concerned also about just the general effect on the economy, but we have seen reasonably stable results as they have now informed that the expert on the subject, David ____ is on the telephone and can fill in admirably from my attempt to supply you with an answer. David? Can you give us the correct answer?

Marc, I agree with you totally. You definitely heading down the track that I would have talked about. Ray, I think you know, this is a very tough credit environment, we have got to be cautious about it. We did reasonably well in terms of charge off rate, first quarter of this year versus last of it, 508 versus 545. That is an uptake from the end of the year, but that reflects sort of normal seasonal patterns on our view. We think we are still at the level where we will be able to manage throughout the year, but it is a relative environment, accentuated a bit by bankruptcies and the bankruptcy law. We were actually in first quarter filings, we were a little bit counter to the industry, while the industry bankruptcy filings were up in first quarter, we were down a bit. The issue is, though, what the bankruptcy might do, and we have certainly seen an increase in filing in recent days and that is some cause for concern. We are trying to match that aggressively, we are actually managing bankruptcies a lot more aggressively than the card business that Chase had in the past. So I think that is positive. In terms of the delinquency rates, you are right, 90 days delinquency was 201 in March, and that was up from the prior year 30 and 60 days were also up a bit. I think as we said, in the third quarter, last year we changed and moved to, what we think, as a better collection system, no great time to do that ever, and so we definitely had a little blip in activity, we think we should have worked through that, as I see, we think we are at levels, so we can manage for the rest of the year.

Okay. Thanks very much, Dave. Marc on emerging markets, could you give us some color for what the effect of Latin America and Asia might be on the trading line, and also could you talk a bit about the revenue and credit aspects of the emerging markets businesses during the quarter?

Yeah! We feel pretty comfortable with where we are. Last year's first quarter was exceptionally strong in emerging markets and we clearly did not do as well as last year. But I think we did well for a normal quarter, we have had a very tight focus on what our credit exposure is in both Latin America, and Asia has generally been reduced over the last several years. We continue to look at it closely and continue to feel that we are at a good point in terms of our credit exposure related to our overall commercial credit exposure, capital, and earnings. I would say probably on balance, we would look for better contributions from the emerging markets area as we go through the year than we had in the first quarter, and that, we are, you know, basically feel like most of our credit exposure are in the right places. It is not without real scales, they are not in most places in the world today. But we think it is in relatively good shape

Given all of the activity that we have seen on emerging markets over the quarter, could you talk a bit about the impact of that on your trading line?

The impact in emerging market is ---

Yeah, in a sort of emerging market in power, how much of the trading profits would have come from emerging markets?

Not much.

Not much?

No.

It was very strong in the first quarter of last year and not very strong in the first quarter of this year.

Thank you.

Okay yeah.

Mark, trying to ________- and some other things, you not only have a fair number more data points about how the merger with J P Morgan is going, but you have a fair number of more data points about how the markets are going and how the economy looks and things like that related to the last primary months. Sometimes, when you are in the middle of a change in trend, it is hard to know exactly how to assess that. It looks like you guys are facing after the merger, more confident about how your relative performance is going to stack up versus what you might look at your competitors in any reasonable economic scenario? My question would serve to be truthful. What is, as you related what has happened in the last few months through the year alternative scenario planning. Could you do, there is still a lot of very sophisticated risk management. Has there been anything that has been outside your range of expectations, and has there been anything that you wanted to change, for instance, John Chambers said they did not expect the 100 year flow in their account. They sort of feel, and there are few people out there who are now talking, about maybe went for a Japanese sort of experience after their bubble burst. It is a long time before you get back to where you used to be. So my question is, sort of, based on your scenario planning and how you look, are you changing any of your absolute targets as opposed to your relative targets, and have you followed about it in the trend lines for market sensitive revenue growth in the intermediate and long-term still intact, that the expectations for private equity investing still intact. Should we expect it or perhaps could we give some of your expectations?

Our view is that this is a cyclical change and not a secular change. We do not think that the long-term outlook for growth and securities markets worldwide has changed. We do not think that the increasing trends or more equity holdings by more individuals across more places in the world has changed. We do not think that the outlook fundamentally for the private equity business has changed. We think in some ways the general reduction in interest rates, the pricking of whatever bubbles might have existed are probably long term positives for all of those trends. Although should the short term negatives for those trends. So our best guess is that we have to deal with this on a cyclical basis and deal with the difficulties in the economy for however long that takes, which we are preparing to do by focussing as we always have on the possibility that we are going to a lot of 100 year floods and preparing for that and also about focussing on expenses, but we have not changed our fundamental belief at the long term business of participating in markets around the world especially in wholesale markets, where we have a commanding market share and a good strategic position is that we believe is a good long term investment thesis. That maybe a good point to stop although, Juda, maybe I will take your question

Actually it is a credit question mark. It looks like you had a step up of Asian recoveries this quarter and I am just curious if that it was really should be one time phenomenon or are we coming to the end of or what were your view is in terms of cure rates going forward over the next couple of quarters whether that was part of an anomaly and more broadly if you could address the TELCO exposure where in your annual you showed I think over 10 billion dollars exposures a big growth year on year what was in that growth? What explains the magnitude of that growth on the balance sheet is everybody is nervous about telco what can you say other than the fact that it is all investment grade?

I used to think that investment grade was good, but I experience right now that it has not been as good. I will comment briefly on the issue of Asia and then I am going to ask Peter Hastings to make some comments. With regard to Asia it is always true that one of the great benefits of going through a bad credit side is you get recoveries from that bank credit and you also get the line down on the non performing assets and that is part of the diversification reports already we have, which we think is the basic strength. It is hard to say that we are at the end of it, we are clearly getting near the end of it and non-performing assets have come down considerably in Asia and they have ways to go and I think we still have some additional recoveries to go. It is hard to predict which quarter they are going to fall in, but I would say we will probably continue to benefit from that somewhat over the remainder of the year. To respond to your question on Telco and also a little more broadly on credit, I would like to ask Peter Hastings to make some comments. Peter did announce yesterday that after a fabulous twenty-five year career at the bank he is going to be leaving to do some other things. Peter helped build our loans and navigation business and has done a great job in trying to put together the different credit cultures and investment credit discipline and is now excited about doing some other things. Therefore, I think he can talk with a very objective viewpoint of what the credit is and where it is going and Peter maybe you can make a few comments

Thank you Mark and certainly with added perspective - let me just affirm that we really do believe that we are going to compare favorably with anyone you would measure us against us certainly on the credit ____ 1:00:24 others. But a couple of things on TELCO the first part of your question the increase was to help several very specific clients to do somethings they did recently and they are the best out there and speaking broadly of our telecom exposure in terms of our aggregate credit profile it is actually only about 5% without wise descent and other than that 70% and 71% is investment grade and these are a very fine and best companies and many of them are ____ 01:01:00 and may be not to have the super stellar ratings that they had is that they are still great companies with the best ratings. We are very, very comfortable with our position in the industry and we do expect incidentally the exposure to winding down in the months ahead. May be just a further comment on credit, one thing that has been unusual about this credit cycle is it is quite different. It has been dominated by the fallen angels. Credit companies who have rapidly descended in ratings. We have never seen that before and there is something that ____ 01:01:41 region can learn from that. We do believe though that if there any losses coming out of these names there are going to be, the recoveries will be much higher than average. So the increase in deterioration will probably be accompanied by a much more moderate degree of loss is any and we are greatly heartened by that in fact. It is really quiet different. The other comment that I would just make is most of the rapid growth that we have seen in the economy and the kinds of the companies that did it were actually not financed here or by banks generally and so it ____ 01:02:17 it is pretty much going to be elsewhere.

This is just to clarify few things. #1 the experience, which we have had with the non-investment credit and I do not know if it is totally true of the industry. So I think that our credit problems have been dominated by what were investment grade industries, I do not know if that is true for everybody, but it certainly has been true for us and secondly, the person you will be hearing from going forward on credit is Dian Hammer is a person who is a 20 plus year of veteran of various credit and lending jobs who I think also brings a great deal of experience to the jobs

In typical analytical fashion two questions if I could #1 some of the other banks have reported to have a inflows of nonperformance this quarter were much smaller and were frequent reminiscent of credit problems dipping down in to corporate America if you would and I wonder if you could give some commentary on little market portfolio and a kind of less interested in and I don't see that as an issue for chase per say, but looking for inside on to what effect may be on some other regional banks are more ready to that business, so #1 what are you seeing in credit deterioration?

It is hard for me to comment on that. We are not seeing much deterioration, but again our approach to that is fundamentally different I think, and then our general approach to commercial credit is to originate for distribution.

Now I am talking more to the mini market business and ....

Even if you mean a market we tried to avoid concentrations and avoid the thought process that the nirvana or the way to grow in the industry is to grow in loans and so I think we just have fundamentally different view maybe others in the industry do

This is question #2 then seems to me that the revenue mix for the first quarter was skewed towards your sweet spot in fixed income and you seem to be somewhat more cautious obviously on revenues going forward. How do you feel about your relative performance, if you know in fact that we do get a more evenly distributed mix in revenues going forward for the rest of the year. But we do not get a snap back to the old highs where you know kind of everybody is benefitting?

Now I think that is a good point, I think we have benefitted from obvious expertise in the fixed income business. I think in some ways you could even argue that it is a little bit of blessing that there is no equity market right now, because it gives us a chance to pull our integration act together and be prepared and a lot of these things have very long lead time in terms of who is going to be the underwriter often just started just six months ahead of the actual action. I think we are able to have a lot of strategic decisions for customers that will prepare us for the future. I think you know the benefit of this merger is to round out the product base that we have and hopefully to be positioned well in all types of markets no matter what product is the product of the day and that we ensure our clients by having leadership in that product capability that is the key thing and I think that is a long- term process. I was talking to an account relationships officer this morning who was telling me about a meeting he had yesterday with the CEO of large $10-million revenue company where they had about a two-hour meeting focussing on a strategic dialogue in a way that he had never been able to have before and the ability to add equity research, the ability to add a broader variety of clients around the world in that industry that we know something, that our potential merger partners either are equal or are acquisition targets, I think that brought tremendous additional credibility and it is this repositioning of our company with our clients that is not going to happen in 90 days, but the early signs of it are so strong that it reinforces our conviction that over the long term it is going to happen and in all types of markets we are going to be the beneficiary because we have the broadest product platform. That I think is the fundamental thing. If I take away from this meeting, it is that the short- term outlook is tough depending on the market, but the long-term outlook is more encouraging than ever because we believe in the long term growth of these markets, and because we think we are positioned extremely well for it. With that I think we will bring it to a conclusion and thank you very much for being here.

Thank you this does conclude today's tele conference.