The Evolution of Credit in the Investment Bank - PowerPoint PPT Presentation

1 / 50
About This Presentation
Title:

The Evolution of Credit in the Investment Bank

Description:

US investment grade syndicated loan issuance ... Fewer active bank investors. Now. 12. Consolidation of US financial institutions. 1990 95 ... – PowerPoint PPT presentation

Number of Views:217
Avg rating:3.0/5.0
Slides: 51
Provided by: marilyn
Category:

less

Transcript and Presenter's Notes

Title: The Evolution of Credit in the Investment Bank


1
The Evolution of Credit in The Investment Bank
Investor Presentation May 7, 2003
2
  • This presentation contains statements that are
    forward-looking within the meaning of the Private
    Securities Litigation Reform Act of 1995. Such
    statements are based upon the current beliefs and
    expectations of JPMorgan Chase's management and
    are subject to significant risks and
    uncertainties. These risks and uncertainties
    could cause our results to differ materially from
    those set forth in such forward looking
    statements. Such risks and uncertainties are
    described in our 2002 Annual Report on Form 10-K,
    filed with the Securities and Exchange Commission
    and available at the Securities and Exchange
    Commission's internet site (http//www.sec.gov),
    to which reference is hereby made.

3
Agenda
  • Introductory Remarks Don Wilson
  • Dynamics of the Credit Market John Steinhardt
  • Credit Risk Management at JPM Don McCree

  • Blythe Masters
  • Role of Credit in IB Relationships Doug
    Braunstein
  • QA - - Moderated by Dina Dublon

4
Dynamics of the Credit Market John
Steinhardt
1
5
Key points
  • The corporate credit markets are large, growing
    and interconnected
  • Evolution of the credit markets is driven by
    borrowers and investors
  • Risk management tools are growing and
    accelerating convergence
  • JPMorgan is pre-eminent across the credit markets
    and driving for changes that provide liquidity

2
6
Market interconnectedness
Equity
Loans
Loans
Credit Derivatives
High Grade
High Yield
Bonds
Bonds
Securitizations
3
7
Global corporate credit issuance
( in trillions)
CAGR 16
1Q02
Source Thomson Financial, Loan Pricing
Corporation
4
8
New issuance growth by asset class
( in billions)
CAGR 18
CAGR 13
CAGR 28
CAGR 6
Syndicated loans
High grade bonds
Asset-backed securities
High yield bonds
Source Thomson Financial, Loan Pricing
Corporation
5
9
Growth credit derivatives trading
( in billions)
CAGR 63
Market Participants
Bank Portfolio Managers Re-insurers
Bank Portfolio Managers Re-insurers Hedge Funds
Bank Portfolio Managers Re-insurers Hedge
Funds Insurance Companies Asset Managers
Source BBA Credit Derivatives Report 2001/2002,
published September 2002 using dealer
estimates Note Includes asset swaps
6
10
Global syndicated credit facilities
( in trillions)
1Q02
Source Thomson Financial, Loan Pricing
Corporation
7
11
US syndicated loan issuance
( in billions)
1Q02
Source Thomson Financial, Loan Pricing
Corporation
8
12
US leveraged loan issuance
( in billions)
1Q02
Source Thomson Financial, Loan Pricing
Corporation
9
13
US leveraged loan investors
Source JPMorgan led US leveraged loan
transactions
10
14
US investment grade syndicated loan issuance
( in billions)
( in billions)
1Q02
Source Thomson Financial, Loan Pricing
Corporation, Federal Reserve
11
15
Banks are the primary investors
1995
Fewer active bank investors
Now
Source JPMorgan led investment grade loan
transactions
12
16
Consolidation of US financial institutions
199095
1996
1997
1998
1999
2000
2001
2002
Manufacturers Hanover Chemical Chase
Manhattan J.P. Morgan
Chemical
Chase Manhattan
JPMorgan Chase
BankAmerica Continental Bank Security
Pacific NCNB Citizens Southern Sovran Barnett
BankAmerica
Bank of America
Nations Bank
Nations Bank
Banc One First Commerce First Chicago NBD
Bank One
First Chicago/NBD
First Bank U.S. Bancorp Firstar
U.S. Bancorp
U.S. Bancorp
BankBoston Bay Bank RIHT National
Bank Fleet Bank of New England Shawmut Summit
Bank United Jersey
BankBoston
FleetBoston
Fleet
FleetBoston
Summit
First Interstate Wells Fargo Norwest First
Security
Wells Fargo
Wells Fargo
Wells Fargo
First Union First Fidelity Signet Philadelphia
National Bank Wachovia
First Union
First Union
First Union
Wachovia
Sun Crestar
Sun Trust
37 Institutions
8 Institutions
13
17
Global credit markets today
  • Ample supply of liquidity
  • Tools to price relative value between asset
    classes are becoming market standards
  • JPMorgan remains on the forefront of convergence
    and change
  • Market Flex
  • Relative Value Pricing (RVP)

14
18
Pre-eminence in the credit markets 2002
Credit DerivativesHouse of the Year 2002
Winner of CreditDerivatives Strategy 2002
The Worlds Best at Credit DerivativesEuromoney
Awards for Excellence 2002
Source Thomson Financial for league table
information
15
19
Credit Risk Management at JPM
Don McCree/Blythe
Masters
1
20
Credit risk at JPMorgan Chase
  • JPMC remains the market leader in debt financing
    and credit risk management
  • Our return on credit is sub-optimal
  • Excessive concentrations have adversely affected
    recent results
  • In 2002 the firm fundamentally changed its credit
    risk management practices
  • Credit remains core to the firms client-driven
    franchise

2
21
Investment Bank results
( in billions)
3
22
Commercial credit exposure risk profile
( in billions)
Non-Investment Grade
Investment Grade
Nonperforming 3.3 4.1 3.7 of
Exposure 0.8 1.0 0.9
4
23
Commercial criticized exposure trend
( in billions)
1.2
1.6
Emerging Markets
2.1
Merchant Energy
Cable
Telecom Related
All Other1
1 Includes Enron-related exposures including
108 million subject to litigation with
credit-worthy entity
5
24
Commercial credit costs
( in billions)
6
25
Peer comparisons
Total Commercial Loans to Total Assets - 1Q 2003
Cumulative Commercial Charge-Off Ratio - 1Q 2000
to 1Q 2003
7
26
Credit risk framework
  • Unified management of credit risk functions
  • Addressed constraints, incentives and controls

Policy Governance
  • Maintained underwriting capabilities and
    independent approval
  • Leverage world-class primary distribution
    capabilities

Transactional Credit
  • Instituted more active portfolio management
  • Mitigated losses through expertise in workout and
    restructuring

Portfolio Management
8
27
Improved credit portfolio management
  • Control risk
  • Improve return liquidity
  • Recycle client capacity

9
28
Concentration management
  • Client and industry thresholds (notional and
    capital) address concentration risk
  • Internal pricing of all new over-threshold client
    transactions factors in hedge costs
  • Exposure concentrations are managed down through
    client planning and portfolio management
  • Clients over threshold are reviewed regularly

10
29
Results
  • Since August 2002, reduced the number and amount
    of over-threshold client exposures by
    approximately 25 and 15, respectively, with
    limited client impact
  • Aggressive reduction underway in select
    industries
  • Telecom related industries exposure declined
    from 20.4B to 16.7B over the last 15 months
  • Country risk constraints were effective in 2002
  • Brazil exposure reduced from 3.3B to 2.1B
  • Argentina exposure reduced from 0.6B to 0.4B

11
30
New credit capital methodology internal pricing
of loans
  • Moved from historical through-the-cycle default
    probabilities to market-based measures
  • Capital more reflective of current market
    conditions

New Capital Model
Old Capital Model
  • Modeled only losses due to default
  • Approach a blend of historical 20-year average
    (75) and market (25) default rates
  • Losses based on long-dated study of charge-off
    experience
  • Models losses due to default and risk migration
  • Approach based on 100 implied market default
    probabilities (KMV EDFs)
  • Losses based on updated study of loss experience

12
31
Results
  • On a proforma basis, IB credit capital at
    year-end 2002 increases by approximately 28,
    offset by other changes to capital allocation
  • Proforma IB credit capital as of 3/31/03 only
    increases by approximately 21, primarily due to
    exposure reductions
  • Provides for better differentiation in customer
    and product profitability analysis
  • Incentivizes innovation to improve risk-return
    profile, such as Relative Value Pricing (RVP)

13
32
Proactive management of residual portfolio
  • Credit Portfolio Group actively manages the
    firms retained commercial credit exposures
  • Is the most active global user of credit
    derivatives and loan sales in portfolio
    management
  • Establishes forward looking, actionable views to
    address concentration and event risk
  • Accounting asymmetry creates P L volatility
  • In 2002, 127MM of hedge gains were disclosed as
    part of trading revenue, with 94MM related to
    the accrual portfolio
  • Since 12/31/01 quarterly hedge performance has
    ranged from a loss of 318MM (Q4 02) to a gain of
    246MM (Q2 02)

14
33
Results
  • Hedging covers approximately 10 of notional and
    frees up approximately 10 of capital
  • As of 3/31/03, 40 of derivative receivables are
    collateralized
  • Loan sales of close to 5B in 2002 and 1Q 03
  • Purchases of new CDS protection of close to 14B,
    with 7B of offsetting unwinds and maturities
  • Incremental hedging is expected to reduce IB
    over-threshold exposure by approximately 10 -15
    in 2003

15
34
Commercial exposure portfolio management
( in billions)
JPMC Credit Exposure 12/31/01 12/31/02 3/31/03
Loans 105 92 88 Commitments/LC 248 238 231 Subt
otal 353 330 319 Derivatives (balance
sheet) 71 83 87 Derivatives Collateral (20) (30) (
34) Derivatives net 51 53 53 Total net
exposure 404 383 372
Portfolio Management Single name
hedges (19) (24) (26) Portfolio
hedges (19) (10) (10) Total (38) (34) (36)
16
35
Credit remains core strategic offering
  • Credit competence is a competitive advantage
  • Managing aggressively against new set of
    constraints
  • Focused on improving risk/return equation
  • Taking balanced approach to relationships

17
36
Role of Credit in Investment Banking
Relationships Doug
Braunstein
37
Key trends have impacted the competitive landscape
  • The role of credit has increased in importance to
    clients
  • Linkage between products within markets continues
    to strengthen
  • Investment Bank and Commercial Bank boundaries
    are weakening

1
38
Credit is a significant factor for clients
66 of overall companies consider a banks
willingness to share risk a significant enough
factor to overturn a long-term Investment Banking
relationship
75
73
70
66
59
59
50
45
43
37
37
34
26
23
19
9
Company Depth of IB Experience
Market Capitalization
Source Brendan Wood International Note Results
based on 696 U.S. citations for the year ending
Q1 2003
2
39
Importance of credit providers has increased
Fewer Active Bank Investors
Decreasing Bank Group Sizes
29
26
26
41 decline
89
31 decline
81
23
21
68
65
18
18
61
17
Source Loan Pricing Corporation
Source JPMorgan led Investment Grade transactions
3
40
Markets are increasingly interconnected
Industrial Company
Stock Price vs Credit Default Swaps
Stock Price
CDS (basis points)
Loan markets
CDS markets
Bond markets
Fortune 100 Corporation
Bond Spreads vs Credit Default Swaps
CDS (basis points)
Equity markets
Source Bloomberg, JPMorgan Note Credit default
swaps quoted as 5 year mid-level mark
4
41
Issuers utilize multiple products
Companies using multiple products
487 Issuers
Loan Syndications 500mm
324 Issuers
235 Issuers
9
33
Loans
Bond UW
Equity UW
MA
25 Issuers
Source Thomson Financial / SDC, JPMorgan Note
Data for U.S. issuers in 2002
5
42
A broad platform helps meet a clients objectives
JPMorgan Role
April 10MA Acquisitionof 34 of Hughesfor
6,600mm Financial Advisor
March 19Convertible1,655mm Joint Bookrunner
March 12Bond500mm Joint Bookrunner
Acquisition
March 4Tender OfferUp to 500mm Dealer Manager
Financing
Financing
6
43
Investment Banks have increased presence in credit
1995
2002
This is an issue of pull, not push. Its not
that brokers are pushing capital down clients
throats, its more that clients are pulling and
demanding it. Glenn Schorr - UBS Warburg
Source Thomson Financial / SDC, Bloomberg Note
Data for U.S. Syndicated Loan market
Quote from January 15, 2003
7
44
Full Service Banks are gaining market share
Aggregate market share of Full Service Banks
Source Thomson Financial / SDC Note Full
Service Banks included are JPMorgan, Citigroup
and Bank of America
8
45
The same is true in bonds
Aggregate market share of Full Service Banks
Source Thomson Financial / SDC Note Full
Service Banks included are JPMorgan, Citigroup
and Bank of America
9
46
Landscape has changed significantly
FY 1995
U.S. Syndicated Loans
U.S. Convertible Offerings
Q1 2003
U.S. Syndicated Loans
U.S. Convertible Offerings
Source Thomson Financial / SDC
10
47
Clients use the portfolio of products
Use of Products by JPMorgan Clients
Source JPMorgan, Bloomberg Note For the time
period from 2002-YTD 2003
11
48
JPMorgan focuses on the clients that matter
Global Priority Clients
  • Account for
  • 56 of MA industry volume
  • 63 of Equity industry volume
  • 75 of Bond industry volume

Consumer / Healthcare
TMT
Diversified Industries
Banks Insurance
Natural Resources
Investor Clients
Real Estate
Total Priority Clients 2,215
Source JPMorgan, Thomson Financial Note For the
time period between 2002-Q1 2003
12
49
JPMorgan has established leadership
JPMorgan ranking versus key competitors1 - Global
Investment Grade
High Yield
MA
Equity and
Corporate
Corporate
Syndicated
Announced
Equity-Related
Debt
Debt
Loans
ABS
JPMorgan
3
3
2
1
2
1
3
2
1
Citigroup
Merrill Lynch
1
1
Goldman Sachs
2
2
3
3
Morgan Stanley
1
Credit Suisse First Boston
Lehman Brothers
2
Deutsche Bank
UBS Warburg
Bank of America
3
Source Thomson Financial SDC 1 Rankings for Q1
2003
13
50
Q A
Write a Comment
User Comments (0)
About PowerShow.com