Case Study: Chesterstons Ales

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JPMorgan Chase Co. Presented by Piotr
Chorzewski 12-2-2004
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Trends in profitability in 2003-2004

• High return on assets 1.4
• High return on equity 15.3 (highest since 93)

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Factors which have impact on the profitability

• Reduction in non-interest expenses
• Significant reduction in provision on loan losses
• Debt refinancing by households businesses
• Increase in fees associated with origination,
  sale and serving mortgages
• Fast growth in non-interest income
• Bank holding company stocks outperformed SP 500

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Banks vs. SP 500
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Strategic benefits of the merger

• Enhanced positions in retail financial services
• More balanced business mix and greater
  geographical diversification
• Enhanced opportunities for wholesale and other
  financial services businesses
• Financial synergies (cost reduction)

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Interest income and expense JP Morgan
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Interest income and expense Bank One
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Interest income spread
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Interest rate spread JP Morgan prior merger
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Interest rate spread Bank One prior merger
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Interest rate spread of the merged company
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Interest rate spread of the merged company
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Interest Rate Spread
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Non-Interest revenue

• High volatility of different components

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Non-Interest revenue
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Non-Interest expenses
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Scenario

• Growth of Non-Interest revenue - 1.5
• Constant growth of Interest Income spread 0.1613
• Reduction of assets by 4 in 2005
• Long term assets growth 1.5
• Merger savings 3,000mln
• Merger costs 2,200mln
• Modest growth of the non-interest expenses 1.5
• Provision on credit losses decrease annually 1
• Current P/E 18.20

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Income Statement - forecast
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Sensitive analysis

• Growth rate of Non-Interest Revenue

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Sensitive analysis

• Growth of Non-Interest Expenses

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Sensitive analysis

• Growth of interest income spread

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Sensitive analysis

• Growth of assets

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Comparison
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Comparison
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Summary

• Benefits of the merger
• Growth of Interest rate spread, but still too low
• Reduction of non-interest expenses
• Growth of non-interest revenue
• Quite low EPS High PE