摩根大通 (JPM) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the J.P.

Morgan Chase fourth quarter 2003 full year review conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.

It is now my pleasure to introduce your host, Ms. Dina Dublon.

Ma'am, you may begin.

Thank you very much, good morning to all of you on the call.

The purpose of the call is to discuss our financial results for the quarter and for the year.

I will touch on the merger at the end but now we'll concentrate on the results.

Over this past year, our focus was on improved financial performance in execution of key initiatives to reduce risk, increase capital and improve productivity.

We have believers.

Earnings rebounded strongly driven by revenue growth from all businesses and a dramatic decrease in commercial credit costs.

The Investment Bank and Chase Financial Services had record earnings for the year.

We lowered the rates in both the commercial credit and private equity in the 4th quarter.

Our capital is stronger today than it was a year ago, economic capital allocated to the businesses declined by $4 billion while the equity capital of the firm increased by $5 billion.

Slide two.

Earnings for the quarter of $1.9 billion were up 14% from the third quarter and we more than doubled the operating results in the 4th quarter last year, earnings for the year of $6.7 billion were twice last year's level.

We had positive operating leverage with revenue growth in excess of expense growth rates and lower credit costs compared to all prior periods.

Earnings in the 4th quarter included an adjustment to bring our corporate tax rate to 33% for the full year and an adjustment for using compensation costs to reflect full year incentives.

Return on aggregate was 17% for the quarter and 16% for the year.

In the bottom of the slide, 4th quarter earnings per share was 89 cents, for the year, $3.24, significantly up and moving to slide 3, all businesses contributed to the 13% growth or $4 billion in revenue growth for the year.

Investment Bank revenues increased 16% or $2 billion, Chase Financial Services had another record year, adding over $1 billion to revenue and for the year, J.P.

Morgan's partners had an $800 million from the very large loss in 2002.

Slide four is commercial credit only.

The right side of this slide shows the continued decline in criticized exposures rated triple C or lower.

They're down almost $8 billion or 50%.

Commercial nonperforming assets were $2.4 billion at year end, down from September and down almost $2 billion or 40% from the end of '02.

On the left side, growth charge offs came down significantly in the 4th quarter to half the level of the 3rd quarter and less than 25% of the level in the 4th quarter last year.

We also had high recovery this quarter, resulting in commercial credit cards of only $8 million or about 4 basis points on loans.

Commercial and residual reserves were reduced about $260 million this quarter, the residual components remains at our policy maximum of 20% of the total reserves.

Commercial credit cards for the quarter were a benefit of $250 million.

The including trend should continue but decelerate from the pace we had this year.

We expect to reduce reserves further in 2004 but credit cards or the provision, should be higher than in '03, commercial and residual provisions in '03 were only $50 million.

Moving to slide 5, we made significant progress on the year lowering risks on commercial credit and private equity, on the left side of the slide, commercial credit risk capital is down $5 billion or 40% from the end of '01.

Total commercial credit exposure is down $60 billion over this time period.

We are actively managing risks, we added $11 billion in single named credit default swaps this year, up to $35 billion, and sold higher risk loans and commitments.

We continue to reduce single name concentration.

In '04, commercial credit exposures may increase as M&A activity and loan demands pick up.

On the right side of the page, the private equity portfolio is smaller and more diversified.

The book value as a percentage of common equity has been cut in half since 2000, with greater diversification by industry and investment ties.

The book value at year end was $7.3 billion, down almost 40% from the end of 2000.

On slide 6, we have a stronger capital position today than we did a year ago.

Commercial credit and private equities risks are down, driving a larger amount of unallocated capital, unallocated economic capital that is now sitting in corporate.

Here, one capital increased $5 billion with some earnings.

The dividend pay out ratio was 43% in '03, half the level in '02.

Assets are up slightly from the end of last year, but risk-weighted assets are up about 12% in part reflecting a change in the calculation.

Moving on to Investment Bank revenues on slide 7, this is a break than we provided in the press release hoping to add value here.

Total Investment Bank revenues for the year at $14.4 billion were up $2 billion from 2002, but please note that we're still lower than in 2001.

The next part of the slide breaks Investment Bank revenue into client, treasury and portfolio management.

Portfolio management revenues include both our proprietary trading unit and revenues from risk positions in our client-related market banking.

In total, $2.4 billion or 17% of Investment Banks revenues in '03.

Note; they were close to $4 billion in '01.

Portfolio management revenues contributed to the rebounding trading revenues from '02 but still, are at a much lower level and lower percent of revenues than in '01.

In fact, investor/client revenues in trading businesses has been the growth driver since the J.P.

Morgan merger.

Treasury financial revenues at 12% of the total, or $1.7 billion, have been tied over the last three years as rate s decline.

We expect these revenues to decline less than 10% of Investment Bank revenues as rates rise.

We should see lower securities gains and net interest income from treasury business.

Finally, client revenues were 71% of revenues or $10.2 billion in '03, compared to 63% of revenues in '01.

The bottom table highlights that 4 1/2 billion of client revenues comes from our trading businesses.

It has grown at a compound annual rate of 21%.

That is the source of our optimism; we expect investor clients activity to grow in the rising rate environment as well.

Note that investment banking fees in all other client revenues are actually down over the two-year period as IBC has not yet returned to '01 levels.

Again, a source of upsizing.

Moving to slide 8, we had a very strong quarter in investment banking fees with $830 million in revenues, the highest quarterly level in two years, and at about 30% from both the 3rd and 4th quarter of last year.

Equity underwriting had its best quarter in three years.

For the year, Investment Banking fees were $2.9 billion, an increase from an increase of 6% from last year.

In Europe, we were the only top-ranked firm across the equity, bond and M&A market.

We doubled market share in equity and equity related in the U.S. or globally.

The Microsoft transaction demonstrates our innovation, the $1.5 billion Suisse Franc equity link offering for Suisse Phone shows our global reach.

We can deliver results by integrating products, expertise and capital to the clients' benefit.

The pipeline in December was up from last quarter and from the 4th quarter last year.

We could pick up in M&A and syndicated lending, though still a very modest increase.

Slide 9, moving to Chase Financial Services, 4th quarter earnings of $560 million were up 23% from the year ago.

Revenues of $3.6 billion were up 8% and return on equity for the quarter was 25%.

Full year earnings of 2 1/2 billion are up 8% from the record level in '02, driven by very strong results in all of the credit businesses, partially offset by a large decline in regional banking income.

Return on equity for the group was 28%.

Mortgage drove the revenue and income increase for the quarter in the year, keeping records in application, origination, revenues and profits.

Revenues of $870 million for the 4th quarter may trend slightly lower from here though income is at a sustainable level.

Origination and warehouse balances continue to decline while servicing and loans portfolio, particularly in home equity, continued to rise.

Servicing was up to $470 billion in the quarter, originations were down to $50 billion and we expect it to further decline in the 1st quarter, we have reduced the workforce here and expenses will decline.

I am, again, referring to the mortgage business.

Card revenues were up 4% from comparable periods.

The business broke a record, 4.2 million new accounts in '03, a 14% increase over last year.

Charge volume was up 7% to $60 billion though attrition and high payment rates, which is kind of the other side of the refi boom that consumers are very liquid, puts pressure on revenues in the card business.

Record deposit levels for the year in the regional banking, up 7% and middle market business up 17%, were more than offset by the impact of lower spreads.

Income was significantly lower as spending on branch technology increased while revenues declined.

Also, revenues for the year were also a record, driven by $28 billion in originations for the year.

Overall, an outstanding year for the business.

Slide 10, investment management and private banking had its best quarterly performance, clearly set on the right side of the V-shape.

Earnings of $100 million was up 23% from last quarter and up significantly from a very weak 4th quarter last year.

Pretax margin improved to 18%, and return on intangible equities was 31%, return on total allocated equities was lower.

For the full year, revenues of $2.9 billion were flat to last year, and earnings of $270 million was up only 3%.

Just as a parenthesis comment, the average level of the S&P 500 in '03 was actually lower than the average level in '02.

Assets under supervision at the end of the year were $768 billion, they were up 18% from last year and 6% for the quarter.

In the quarter, we had positive net inflows to assets under management in retail and private banking.

All major asset classes in U.S. institutional equities were above benchmark in '03, creating positive outlooks in our investment performance is the key to retaining and growing institutional assets.

For '04, the rising equity values and increased market activity should continue to see growth.

Slide 11, treasury and security services, record revenues of $1.1 billion for the quarter included a $40 million pretax gain from the sale of a small business.

Excluding the gain, revenue was up 10% and still a record.

Fourth quarter earnings of $147 million were up 15% from the year ago quarter due to the gain.

The rebounding revenue and income in the quarter was driven primarily by the recovery in the custody business which had the second sequential quarter of revenue and income growth.

Full-year earnings declined 16%, driven by weakness in custody for the year and, to a lesser extent, corporate trust, institutional trust.

Return on equity was 21% for the quarter and 19% for the year.

We close the Bank One Trust acquisition in the 4th quarter and the Citicorp Electronics Financial Services acquisition in January.

Revenues from these two businesses will contribute 7% to growth in '04.

The portfolio acquisitions and continuing recovery in custody will contribute to strong growth in '04.

Moving to slide 12, J.P.

Morgan Partners reported private equity gains of $159 million, the second consecutive quarter of gains bringing the full year total to small gain of $7 million compared to a large loss in '02.

The direct portfolio had a $900 million swing, driven by realized gains on sales and the timing write downs in the second half of the year.

We reduced the third party funds portfolio by 40% from year-end '02, to $1.1 billion.

Funds performance is stabilizing.

The liquidation phase for third party funds is winding down.

In '03, we invested $800 million in the direct portfolio.

Further reductions in total private equity assets will mainly come from harvesting more than we invest.

The pipeline is good, the Kinko's transaction that announced in early January provides a strong, start for the first quarter.

We are looking for continued improvements in the positive bottom line for the year, though we expect to generate only low returns in '04, with the pace picking up in '05.

Summarizing the year on slide 13, we delivered on what we set out to do in the beginning of the year, improve financial performance and execute key initiatives.

Earnings were at the highest level since the merger we reduced risk concentrations and increased capital.

We expect in '04 to see a different mix of earnings, the Investment Bank is targeting higher issuer and investor client revenues, the securities gains and interest incomes may be lower, mortgage earnings should decline from the record in '03. 4th quarter earnings were more in line with what we expect from the business.

We look for growth in other retail businesses driven by modest revenue growth and improved efficiency but it may not offset lower mortgage earnings.

Improved equity market and increased M&A activity will drive increased opportunities in the private equity and higher fees in investment management and private banking as well as the consumer business.

As in 2003, we expect consumer credit to be stable, but commercial credit costs may rise as the reduction in the allowance slows down.

The quality of the portfolio continues to improve.

Slide 14, just a broader look at '04, as a stand-alone firm, we save the head wins and tail wins I just described.

Tail wins coming from gains in market share, rising equity values and increased market activity.

The Bank One merger is a strong strategic feat.

We are cautious on the short-term outlook, our estimates for cost savings in '04, which is about 15% of the full $2.2 billion would be about $300 million in '04, would be more than offset by estimated amortization expense of about $500 million.

Repurchases resume only post merger.

The spotlight will be on our execution, we have regulatory findings and approvals to get through, management changes to digest, customers and shareholders to complete .

Long-term, we have little doubt about the financial success of the deal.

The combined firm will have lower volatility, higher earnings per share and will compete in retail markets nationally with much more power than J.P.

Morgan Chase could on a stand-alone basis.

With that, I would like to open it up for questions.

Thank you, the floor's now open for questions, if you do have a question, please press the number one, followed by 4 on your touch-tone telephone.

No questions, I can't believe it.

Only good news, no questions.

Once again, if you do have a question, you may press one followed by four.

One moment while I poll for questions.

Our first question is coming from David Stumpf from A.G. Edwards.

Please go ahead with your question.

Good morning, Dina, just a clarification on one of the last statements you made about the Bank One acquisition, you gave some guidance, I think, for the annual core deposit and tangible amortization, did you say if was going to be 500 million annually or is that 500 million in '04?

That's 500 million for six months of '04.

We are again, those are estimates, the estimates are being done on the basis of accelerated amortization up front so numbers decline over time.

Okay, over what kind of life do you think?

We are, at this point, using a 10-year life with accelerated amortization.

These are all numbers that will be subject obviously to new estimates, well be filing a proforma statement probably over the next couple of weeks.

Okay.

Follow-up question related, you mentioned repurchases, did I hear you say no share repurchases until after the deal closes?

That's correct for J.P.

Morgan, we will be able to resume the purchases only after the deal closes.

Bank One announced yesterday they will continue with the regular program for repurchases prior to the closing of the deal.

I do want to clarify that all the amortization numbers as well as the savings number I was talking about before are all pretaxed.

I understand.

Okay.

That's great.

Thanks.

Thank you.

Our next question is coming from Walter Scully of Putnam Investments, please go ahead with your question.

Hi, Dina.

Hi,.

Just a quick question on the regional banking.

If you could give a little bit more color on why the revenues were down, just given that the deposits were up almost 10%, I'm surprised that revenues were down that much.

So, maybe some color on the numbers of the spread compression or if there is something else there?

I will ask Don Layton to address the question.

The way we put our P&L's together, the regional bank is the branch system and approximately 80% of its revenue is just the NII on customer deposits.

We do not book home equity loans there, we do have some small business loans, not a ton, and a few miscellaneous ones.

So, deposits are up nicely but the credit given for deposits has been on a long slide down.

Some of the credit is short term rates, a lot of it is a lag because these are core deposits that are invested over time and that continues to overwhelm the deposit growth.

Thank you.

The spreads were down by about 40 basis points, less than 200 basis points at this point.

The next question?

Our next question is coming from Glenn Shore of UBS.

Please go ahead with your question.

Thanks, hi Dina.

I think we didn't get specifics on the merger announcement, but I don't know if there's been quite that much time in between, I wonder if you might comment on, one, the over limit list.

Obviously credit's improving and you're being more on the portfolio management but there are certain names out there that are still over limit, the new limits and then, two, if you've gotten your arms around any commercial loan overlap between the two organizations?

I'm going to ask Don McCree to address both questions.

We continue to make very good progress on the concentration issues we've had, I'd say we've taken the name by name concentrations down by about 2/3 this year.

We continue to work those down over the balance of the first half of the coming year, in terms of overlaps that are created by the Bank One combination, we haven't gotten into granular detail yet, we do have some concentrations that we'll be working with them on, once the deal closes.

That will probably take us several years to work ourselves down together with our client base.

I will point out that this is a much smaller issue in a deal with Bank One than, obviously we've had in any of our previous transactions.

Fair enough, and just to be clear, Don, the first number last quarter was a half, right?

So there has been some serious progress this quarter?

That's exactly right.

And the progress has been more dramatic as it relates to capital at risk versus books more at risk.

The risk book is improving quicker than the actual reductions.

Actually, that leads into the next question I had on the average allocated capital at the Investment Bank, that 11% sequential drop, is that 100% attributable to the commercial loan book or is there some trading components there as well?

No, it's 100% in fact the commercial credit book, it's larger than the total reduction in CIB capital.

Got you.

And then the last question is --

One too many, here, Glenn, but go ahead.

No, no, go ahead.

I don't want to be a hog.

We'll come back to you.

No problem.

Thank you.

Our next question comes from Aaron Caddell from Blaylock & Partners, please go ahead with your question.

Hi, good morning, Dina, maybe you got this question from Mr. Harris from the board at some point before last week's announcement.

But what's your view.

Do you feel you're sort of leaving something on the table because you're finally after a couple years returning to a more normal pattern of earnings growth looking out to '04 and '05?

Or are you concerned there with would be just sort of tough comps from fixed income trading and mortgage that would make it harder to continue to grow the company without a deal?

No, this is a strategic deal, it does not enter into the context of what do we expect '04 earnings versus '03 earnings to be.

So no, that is not the context in which we evaluate the deal.

The context is a much broader one, we have discussed it, the long term.

One has more balanced earnings mix, and the recognition that we needed to have much more skill in retail to be able to succeed effectively.

That's the context in which those conversations are entered into.

No, we don't feel that this was, I guess your question, bad timing in a broader sense, this is, again, a long-term transaction for the benefit of the shareholders.

Okay, thanks, that is helpful.

Secondly, the reduction in private equity, you continue to review that portfolio, will that be put on hold while you match up yours versus Bank One's or will that continue preclosing of the merger?

No, we will continue.

I do want to highlight, though Eric, that going-forward, what we are doing is we have a large portfolio that has been waiting, putting in quotes, "harvesting".

We haven't been able to sell out of the portfolio with very low level of activity in the last two years of -- in the last two years, so the way we are reducing the portfolio is seasonally having more sales and a somewhat slower pace of investments.

Okay, great, thanks very much.

Thank you.

Our next question is coming from Andy Collins with Piper Jaffray, please go ahead with your question.

Good morning.

Great quarter.

Just in terms of the loan demand, I wonder if you could touch on corporate, middle market and consumer and kind of what we're seeing in those areas?

Make a comment, I am passing it on to Don to discuss middle market and we can go on from there.

Alright.

Middle market loan demand has been flattish for some time now, reflecting the economic conditions not just in the U.S. generally, but we're obviously concentrating mainly in the New York area, which is not a high growth area in the U.S.

So that has been flat, and I say continues to be maybe small growth going-forward.

Consumer can be an interesting mix of the card business had lower than historic growth in 2003, because of the aforementioned, the average household got cash in the door from mortgage refinancing, they were able to carry lower balances on cards.

We expect that to pick up in 2004 from just a lower magnitude of refi growth.

In terms of the mortgage business, we secured ties with the vast majority of our originations that will continue.

The loans we have on the books will be driven more by the warehouse and pipeline of things passing through us than it is permanent hold.

Dave, do you want to comment?

This is Dave Coulter, on the large corporate side, we definitely saw loan demand pick up as we went into the end of the year, and that seems to be continuing well into the first quarter of the year.

In terms of numbers, we did $195 million in loan syndication fees in the 4th quarter, that was up from 125 in the 3rd quarter.

Okay and just in terms of that, you know, how much is one transaction and are we seeing kind of a broadening of the loan syndication activity.

We're definitely seeing a broadening of the loan syndication activity.

Don, you may want to give a little bit of color, but I'd say we're seeing things broadening across the board, we are seeing some big transactions come back with bridge deals to capital markets, we like that.

Yeah, this is Don, I'll just add, it's quite broad in terms of geographic mix and type of transaction.

You probably will see our on balance sheet loan growth grow more slowly than you will our syndications activities as much as this is being put into the marketplace.

Okay, and just one other question on this -- on the merger, is the 500 million and the 300 million you referenced, absent the funding costs, really the only numbers we should focus on for '04 earnings?

Well, those are direct results of the merger.

Whether it's the only numbers you should focus on, I don't know.

But they are the two numbers that are the results of the transaction in terms of, again, estimate of impact for the second half of '04.

Sure.

I mean, we could throw in numbers for cost savings and revenue, synergies but to be conservative, that would be the right way, right?

Right.

Thank you.

Our next question is coming from Guy Moscowski of Merrill Lynch, please go ahead with your question.

Good morning.

I recognize that maybe it's far too early to ask this question, but as we start to model the merged entity, have you given some thought to how you will display things like the regional banking business once you take in Bank One which tends to include in the regional bank business, all of the lending assets?

Are you going to continue to have regional as just a deposit business basically, as Don was discussing, or are you going to change your disclose ours significantly?

We haven't made a determination on the exact aggregation levels and, you know, how are we going to portray businesses going-forward as a combined firm, we'll be communicating as we do make those decisions.

Okay.

That's fair.

And then just a follow-up question, in a completely different area on J.P.

Morgan Partners.

Can you just remind us what type of assets you'll be looking to invest in that business over the next two-years in terms of your own capital and funds that have been raised?

You know, we are -- the private equity business looks across multiple assets, so it has a percentage that goes into venture investments on the margin that's smaller of all.

It has -- it looks at leverage buyouts, it would look across industries.

We're not looking to inning crease this investment in third party funds, but otherwise, the group is operating under diversification guidelines, both across asset classes as well as industries.

And still, obviously, within the context of trying to get down to 10% of the combined capital of the organization?

That's correct.

Again, increase the percentage of others coming in and investing with us is increasing.

Great.

Thanks very much.

Thank you.

Thank you.

Our next question is coming from Katherine Murray of Newburger Burman.

Please go ahead with your question.

Hi, Katherine.

Katherine Murray, your line is live, please go ahead with your question.

We seem to be having problems.

We'll go to the next question.

Our next question is coming from Riley Tierney of Fox-Pitt Kelton.

Please go ahead with your question.

Hi, I have a couple questions.

One, I just wanted to get a sense of if there was any MSR recaptured during the quarter, it seems like the valuations in the MSR were up quite a bit -- about 202 basis points, and I wanted to note if that was just interest rate related or how do the mechanics work there?

Secondly, I wanted to know if you have any exposure to [CARMELOT].

It seems like you don't because your NPAs went down and additionally, you essentially have almost zero commercial charge offs, is that correct?

We tried very hard not to comment on individual borrowers, obviously our results reflect any exposure as we would have had to [CARMELOT] and I prefer to leave it at that.

Your first question relative to MSRs, as rates rise, you will have a revaluation in the write up of the MSR balance, I don't think there was anything unusual.

I think the major driver of the increase in MSR balances is the fact that we have less of them running off.

So as we are booking new business, more of it is causing an increase in the balance.

What you see in the quarter is the actual balance went up to $470 billion.

It went up the prior quarter as well, but not by as much.

What you're seeing is the impact of lower prepayment rates, there is probably also on the margin some impact from rates, but there is nothing different in the valuation methodology applied.

Across, you know -- between quarters.

Okay.

Just one other question.

It seems like you actually reduced significantly the value of the public securities portfolio during the quarter.

Have you guys been trying to take advantage of the rally in the market to sell positions are these where a lot of the gains came from?

You also seem to have made a lot of progress on reducing some of the dollar investments in a number of the other areas, the private fund investments.

Yeah, I presume that you are referring to the public securities portfolio of J.P.

Morgan partners?

Yes, yes.

And we have generally, and we are allowed to sell positions, things in many of the situations we are restricted from selling, as we are allowed to sell, we are selling -- we are in a position to be where the market value of the public securities is about two times the cost basis of those securities, and where they are being carried on the book as a discount.

So my memory of this would be that the market value of those securities is about $1 billion or close to $1 billion.

The cost basis is about 500, and we're carrying it on the books it's about 650 or so.

So yes, we are selling it when they become unrestricted and have done so and will continue to do that.

Okay.

Thank you.

Okay.

Thank you.

Our next question is coming from Mike Mayo of Prudential.

Please go ahead with your question.

Hi, Mike.

How much did you make from the Kinko's and the venture capital portfolio?

The second question, are there any special expenses in the fourth quarter and -- I'll leave it at that.

Okay, you know, our share of Kinko's will generate a gain in the 1st quarter when the transaction closes that it's approximately $150 million.

Approximately.

Your other question was?

Expenses.

Expenses, if there was anything unusual in the fourth quarter, there is always unusual stuff in the 4th quarter as we're closing the year.

I made a comment early on, relative to expenses that we had an adjustment for a full-year incentives that closed in the quarter that reduced expenses from what they would have otherwise been.

How much was that?

We are not being very explicit about that.

It's less than 200 million.

I believe we can say.

Okay.

So, I'm sorry, so relative to normal expense rate, expenses were lower to that by 200 million or some fraction of that?

Some -- it's been an amount that's approximately there.

It's between 150 and 200 million and, again, this is obviously related to the revenues in the quarter as well.

So you can't possibly look in an investment bank, you cannot possibly look at one raising expenses without looking at what's happening on the revenue side at the same time.

But yes, your comments still have value.

The run rate for '03.

I did have one last question on the merger.

When you look at the cumulative capital generation, the chart you had, and you take the 3 1/2 billion a year on buy backs, you wind up with $400 billion with excess capital leftover, after those three years, I was wondering why you had all that excess capital left over, is that just a cushion in case you're projections are wrong, or do you think you will use that extra capital not for buybacks but for acquisition?

What's your thought with that?

We want to have a very strong balance sheet and continue to improve in our ratings.

Any progress in the ratings?

I think the progress you have seen in all three rating agencies announcing a very positive view on the merger with some of them obviously wanting to wait for further on in the execution before they will move on the ratings, but all of them have put either us or Bank One on positive watch.

If you get the upgrade, what would be the earnings benefit.

I think you have gone one too many.

Well follow-up with others.

Thank you.

If I can have the next question?

Thank you.

Our next question is coming from Ron Mandel of GIC, please go ahead with your question.

Hi, Dina.

Hi, I have two questions, actually, one in regard to commercial credit costs, you know, you -- I think you said earlier, at least I wrote down that you said you thought commercial credit costs would be higher than they were in '04 than they were in '03, and compared to the benefit of 249 for the quarter, if I added right, it was a 49 commercial credit costs for '03?

Yeah.

And so, why would it be higher if you still have room to reduce the reserve, I guess, would be my question.?

Because we are not looking to continue reducing the reserve to the same extent we have reduced in '03.

The reductions in '03 are driven by the fact that many of the losses we recognized in '03 were provided for in '02.

Right.

So that is the driver of the reserve reduction in addition to obviously the overall improvement in the credit rating in the portfolio.

We are looking for having low commercial credit costs, but not as low as $60 million for the year.

And I'm not, you know, will not go beyond that in terms of attempting to project a number.

I guess where I was going with that, do you think it would be possible that the actual charge offs --I know you referred to significant recoveries in this quarter without elaborating, but it was saying there's further room for declining gross charge offs, so the net charge offs could be quite low anyway?

We are looking for continuing reductions in net charge offs when you're comparing '03 to '04.

Right.

So yes, we are looking for overall better credit quality of the portfolio, but are not expecting commercial credit costs to remain between 0 and $50 million but to go higher.

Okay.

My other question was also on share repurchases, you had on slide 20 of the presentation last week you said you were going to be buying back $3 1/2 billion in '04 and '05.

Are you changing that now if you're not going to start repurchases until midyear, or are you going to accelerate it all in the second half?

As I mentioned before, I don't think I can be more specific than that at this time.

What we have in place is Bank One continuing with the repurchase activity of the first six months of the year, and us, as a combined firm, again assuming the closing the deal at midyear, and after the combined firm resuming repurchases in the second half and, you know, I--we still believe we ought to be able to execute on about $3 1/2 billion for the purchases on the year, but --

I see, so, in other words, that 3 or 3 1/2 is the combination of Bank One on their own and then --

Absolutely.

And then the combined.

Yes.

Yes.

Okay.

Thank you.

Thank you.

Our next question is coming from Katherine Murray of Newburger Burman.

Please go ahead with your question.

Can you hear me?

Yes, I can.

Good, thank you.

The global treasury revenue, you mentioned why that was down, I wonder if the level now in the 4th quarter is kind of representative of this rate environment or if there's anything special in this quarter?

I think revenues were unusually low in the 4th quarter, we would be looking generally, you know, at the lower level than what we went in '03 but higher than what we happen to have as financial revenues in the 4th quarter.

Okay and then separately, the trading bars seem to be up pretty much across the board in the quarter, I was wondering if you could give us a color on that?

David, do you want to comment?

Trading bars were up in the 4th quarter versus the rest of the year, that reflects, in large part, the way some of the markets as we approach the end of the year, the especially the rate markets on a global basis.

We are a big rates player on a global basis, the way things were moving in concert.

We also had more equity activity in the 4th quarter and it reflects that broad base equity activity.

You'll note the, Katherine, that in the portfolio diversification site, we have more portfolio diversification, so net-net equity -- it's a positive as we look at our business today, but nothing unusual.

We're still working well within the limits, nothing unusual in terms of that bar increase.

The only addition I would have to the comment that David just made is that this is picking up on the trading bar, and we have increase -- when you look at the aggregate bar, and again, we will be discussing that in the annual report or in the K as opposed to in the press release, The aggregate bar for the term, since the increase here in bars is primarily risen by equities, the diversification we've other positions in the firm as such that the aggregate bar for the firm is really just marginally up from where we were in the prior quarter.

Thank you.

Thank you.

Our next question is coming from Brock Vanderly of Lehman Brothers, please go ahead with your question.

Thank you very much.

I wanted to talk about the card business a little bit.

It doesn't seem to be any of the positive seasonality we saw among some of your competitors, I was wondering if you could just comment on that?

I am sorry, Brock, could you repeat the question?

I wasn't paying attention, I apologize.

I was wondering why we didn't see more seasonality to the plus side in the card business in Q4?

Sorry.

Don, please?

Yeah, we haven't been able to analyze all of the competitors, some seemed to have fared worse and some better, our best guess right now is in fact the refi boom cash coming into the households.

Okay.

Next question, please.

Thank you.

Our next question is coming from David Stumpf of A.G.

Edwards, please go ahead with your question.

Thanks.

A follow-up.

On page five of the supplement, you all provide a line of business, highlight summary, and you have got the support units and corporate line item, I understand there was some reclassification in that line, but aside from that, just on the numbers that you did provide, obviously a pretty big contribution to the bottom line from that line item, and could you give a little detail on what is flowing through that line this quarter?

Sure.

That may touch a big contribution?

Number one, and then, number two, is there still guidance there that that number or is it actually going to be a drag on earnings versus the contribution?

Okay.

We did -- we have said earlier this year that we have had this project of cleaning up much of what has been undistributed losses in the corporate center as part of our various MIS policies in the firm and we have done much of that through year end.

I think it's more informative with respect to the corporate undistributive sector rather than focusing on the quarter to look at these for the year as an indication of what the level is going-forward that will come in from the fourth quarter for the moment.

So we have done that clean up and will generally expect the corporate center again on this stand-alone basis, will need to do it again when we merge, but on a stand-alone basis it should be relatively neutral, i.e. close to positive, close to zero, a little bit negative, et cetera.

The big drivers in the quarter, and to some extent in the next year or for the quarter is the fact that we had as I mentioned earlier in the call, lower tax rate in the quarter than flows through corporate undistributed that benefits, we also have moved some acquisition in which we had over allocated capital to the businesses and, therefore, had negative capital in corporate, which results in our MIS system with negative net interest income in corporate.

Okay.

We moved from that position into a position in which we have, close to 4 to 5 billion in excess capital sitting in corporate, which is now generating net interest income.

Okay.

So that is the, you have, those are the two large factors, the other things that will affect the corporate -- is what we've referred to as being the residual reserve, or the residual provision this quarter, it was a -- we reduced the residual reserve, so it was a negative -- it was a negative credit cost or an addition to the bottom line.

I guess is what I'm trying to say.

Right.

So there are certain items that are particular overall for the year, and you will see the number is pretty close to being positive, but pretty close to zero, and I would expect that to be the range for next year.

One follow-up.

Mike Mayo's question that he didn't get to answer.

Any best guess on if you did get a rating upgrade, what sort of earnings benefit might you see?

I don't want to, in a way, speculate on the earnings benefit of an upgrade.

We are in businesses that are sensitive to ratings, and regard continuing improvements in the rating of the firm as one of our priorities.

Okay.

So I would prefer to leave it at that.

Okay.

Thanks, Dina.

I would like to really wrap-up the call.

Thank you all very much for participating this morning.

We are very excited about the merger with Bank One, and look forward to continuing discussions with you for the remainder of the year.

It does feel much better to be here talking to all of you about good news.

Thank you for your support.

Thank you.

This does conclude today's teleconference.

You may disconnect your line at this time and have a wonderful day.