The Chase Manhattan Corporation reported third quarter results.
Operating earnings: On an operating basis, which excludes special items, diluted earnings per share for the third quarter of 2000 were $0.68 per share, compared with $0.92 per share for the same 1999 period. Earnings in the 2000 third quarter were $905 million, compared with $1.19 billion in the same quarter of 1999. On the same basis, diluted earnings per share were $2.68 per share for the first nine months of 2000, compared with $2.83 per share for the same period of the prior year. Earnings in the first nine months of 2000 were $3.48 billion, compared with $3.71 billion for the first nine months of 1999.
Reported earnings: On a reported basis, which includes special items, diluted earnings per share for the third quarter of 2000 were $0.66 per share, compared with $0.92 per share for the same 1999 period. Net income in the 2000 third quarter was $884 million, compared with $1.19 billion in the same quarter of 1999. On the same basis, diluted earnings per share were $2.57 per share for the first nine months of 2000, compared with $2.86 per share for the same period of the prior year. Net income in the first nine months of 2000 was $3.34 billion, compared with $3.75 billion for the first nine months of 1999.
Third Quarter Highlights:
Earnings for the third quarter of 2000 were lower than last year’s third quarter results and lower than analysts’ estimates primarily due to lower income in Chase Capital Partners and to a lesser extent in the Investment Bank:
— In Chase Capital Partners, unrealized write-downs, primarily due to price declines in publicly-held securities, more than offset record realized (cash) gains of $538 million on the sales of investments. (See page 7 for a comparison of the corporation’s key financial measures including and excluding Chase Capital Partners for the current and previous quarters of 2000 and those of 1999.)
— In the Investment Bank, trading revenues and corporate finance fees were up from the third quarter of 1999 but down from the second quarter of 2000 due to lower market volatility and trading volumes and a slowdown in leveraged finance. The expense growth rate was high because of the buildup of the investment banking platform.
Strengths during the third quarter of 2000 included:
— Record earnings in Global Services, National Consumer Services and Wealth Management.
— Sound management of credit and market risk. Credit losses and nonperforming assets in the quarter were lower than the previous quarter and the year ago quarter. There were no days in the third quarter in which Chase had a trading loss.
“While third quarter performance did not meet our expectations, the results do not diminish the confidence we have in the growth capacity of our businesses,” said William B. Harrison, Jr., Chairman and Chief Executive Officer. “Though the value of our private equity investment portfolio may vary from quarter to quarter, we remain firmly committed to Chase Capital Partners’ with its ability to create substantial long-term cash returns on investments. In addition, we are focused on achieving a better balance of expense to revenue growth in the Investment Bank. Across the franchise, our Global Services, National Consumer Services and Wealth Management businesses achieved record results, underscoring the importance of a diverse business mix.”
On September 13, 2000, The Chase Manhattan Corporation and J.P. Morgan & Co. Incorporated agreed to merge. The merged firm will be named J.P. Morgan Chase & Co. The merger is expected to be consummated by the first quarter of 2001. Since the merger was announced, the following progress has been made:
— Over 35 senior positions were named upon the announcement of the merger; an additional 250 key positions will have been announced by the end of this week.
— The major U.S. regulatory applications have been filed; the joint proxy statement was filed with the SEC on October 5.
— Clients are reacting favorably to the proposed merger by inviting Chase and J.P. Morgan to make joint pitches for business; the two firms have won a number of joint investment banking mandates as a result.
“Integration efforts have been proceeding swiftly,” said Mr. Harrison. “We have more evidence that the combined and complementary product mix and client base of the new firm will promote growth opportunities and business synergies ahead. We will have a broader and more diversified wholesale banking platform, along with significant opportunities to moderate investment spending and to improve operating efficiencies.”
Third quarter 2000 results reflect the acquisitions of The Beacon Group, LLC, on July 6, and Robert Fleming Holdings Limited on August 1.
Operating revenues in the investment bank were $1.87 billion in the third quarter of 2000, up 16 percent from $1.62 billion in the third quarter of 1999. Cash operating earnings in the third quarter of 2000 were $384 million, down nine percent from $420 million in the third quarter of 1999. A decline in shareholder value added during the third quarter to $46 million reflected both the decline in cash operating earnings and the higher equity allocated to the Investment Bank as a result of the acquisition of Flemings.
— Total trading revenues, including related net interest income, were $680 million, compared with $679 million in the third quarter of 1999 and $841 million in the second quarter of 2000. Gains in fixed income trading were offset by declines in foreign exchange and interest rate derivatives due to slower trading activity and an overall decline in market volatility, which adversely affected the flows and spreads of those businesses.
— Investment banking fees were $613 million, up 26 percent from third quarter 1999 levels, and down from $639 million in the second quarter of 2000. Growth in fees from merger and acquisition advisory services and equity underwriting was partially offset by lower fees from loan syndication and high yield bond underwriting due to a slowdown in the leveraged lending markets.
— Cash expenses of $1.26 billion in the third quarter of 2000 were up 47 percent from the 1999 third quarter, and up from $1.06 billion in the second quarter of 2000. Increases were driven by acquisitions and spending to build up the investment banking platform.
CHASE CAPITAL PARTNERS
Private equity gains in the third quarter of 2000 were negative $25 million, compared with gains of $377 million in the same 1999 quarter and $298 million in the second quarter of 2000. Gains included cash realized from the sale of both private and public securities that were held in the portfolio and the unrealized change in the value of investments held in the portfolio, primarily publicly traded securities. Realized (cash) gains on the sale of securities in the third quarter of 2000 were $538 million, more than double the amount of cash gains realized in the third quarter of 1999. These gains were more than offset by declines in the carrying values of investments (primarily in telecommunications) in the publicly held portion of the portfolio. Despite these declines, the current carrying value of the investments in the publicly traded portfolio is approximately 2.6 times their original cost. Approximately 80 percent of the carrying value of the Chase Capital Partners’ portfolio consist of privately-held securities.
In the third quarter of 2000, Global Services’ operating revenues increased nine percent over the third quarter of 1999 to $875 million, reflecting increased activity in its securities businesses. Cash operating earnings for Global Services for the third quarter of 2000 were up 24 percent compared with the third quarter of 1999. Shareholder value added increased to $93 million, an 82 percent increase over the prior-year quarter.
Operating revenues in Global Investor Services (custody) increased 14 percent from last year, reflecting net asset growth and higher transaction volume and net interest income, partially offset by a decline in foreign exchange revenue. Capital Markets Fiduciary Services’ (institutional trust) operating revenues increased 20 percent from last year primarily in structured finance in the U.S. and U.K. Chase Treasury Solutions’ (cash management) operating revenues increased two percent over the 1999 third quarter, driven by higher product revenues across all products and higher balances, partially offset by the repositioning of the trade finance business. Operating leverage continues to improve, with expenses growing at a slower rate than revenues.
Chase’s wealth management businesses include private banking and asset management.
— Revenues from the Global Private Bank increased to $305 million, up 36 percent from the third quarter of 1999. These results reflect broad-based global growth. Cash operating earnings grew 16 percent compared with the prior year. As of September 30, the Global Private Bank had over $180 billion in client assets.
— Revenues from Asset Management increased to $165 million, compared with $43 million in the third quarter of 1999. Results include revenues from Flemings. As of September 30, assets under management were $182 billion.
NATIONAL CONSUMER SERVICES
Operating revenues for National Consumer Services increased to $2.6 billion, an increase of three percent over the third quarter of 1999. Cash operating earnings of $492 million increased by 13 percent over the third quarter of 1999. All five businesses reported double-digit earnings growth.
— Cash operating earnings for cardmember services for the third quarter of 2000 were up 14 percent compared with the third quarter of 1999, reflecting significantly improved credit quality. Operating revenues were essentially flat from the prior year and up six percent from the second quarter of 2000, as higher consumer purchase volume and higher fee-based revenues offset the impact of higher interest rates and a lower level of late fees. Expenses were up reflecting the impact of higher marketing spending. New account acquisitions were significantly higher, and credit card outstandings were up over $1 billion from the second quarter of this year.
— Home finance cash operating earnings were up 21 percent, and revenues increased 13 percent, from the third quarter of 1999. The improved results were due to growth in servicing fee income and gains on securities to hedge mortgage servicing, partially offset by declines in residential mortgage warehouse activity.
— Regional banking group cash operating earnings grew 36 percent, and revenues rose seven percent, from the third quarter of 1999, reflecting higher deposit levels in the consumer and small business sector, higher banking, debit card, and brokerage fee income and disciplined expense management.
— Diversified consumer services cash operating earnings were up 24 percent, and revenues increased five percent from the same 1999 quarter. Income growth was positively affected by a change in internal cost allocation as well as improving auto origination volumes and growth in the discount brokerage business, which was partially offset by the effect of higher interest rates. Brown & Co., Chase’s online trading business, averaged over 41,000 trades per day during the third quarter of 2000 versus 32,000 trades per day during the same period of 1999.
— Middle markets cash operating earnings were up 13 percent and revenues increased four percent from the third quarter of 1999. These results reflect new business and disciplined expense management.
ADDITIONAL FINANCIAL INFORMATION
— The merger agreement between Chase and J.P. Morgan & Co. Incorporated, which has been approved by the boards of directors of both companies, provides that 3.7 shares of Chase common stock will be exchanged for each share of J.P. Morgan common stock. Each series of preferred stock of J.P. Morgan will be exchanged for a similar series of preferred stock of Chase, the surviving corporation of the merger. The transaction is expected to be accounted for as a pooling of interests and to be tax-free to J.P. Morgan and Chase stockholders and is subject to approval by stockholders of both companies, as well as by the U.S. Federal and state and foreign regulatory authorities.
— Chase’s operating revenues, excluding the impact of Flemings and Chase Capital Partners, were up five percent compared with the third quarter of 1999. Cash expenses, on the same basis, were up nine percent compared with the third quarter of 1999. Amortization of goodwill, a non-cash charge to earnings, amounted to $0.11 per share, or $149 million, in the third quarter of 2000, compared with $0.05 per share, or $70 million, in the third quarter of 1999. Similarly, the non-cash charge for the first nine months of 2000 was $0.25 per share, or $318 million, compared with $0.17 per share, or $219 million, for the first nine months of 1999.
— On September 1, Chase announced it had agreed to sell its Hong Kong-based retail banking business, including Chase Manhattan Card Company Limited, to Standard Chartered PLC for approximately $1.3 billion in cash. Subject to regulatory approvals and satisfaction of certain conditions, the sale is expected to be completed by December 2000.
— On October 16, Chase agreed to sell its interest in ChaseMellon Shareholder Services, currently a 50-50 joint venture between Chase and Mellon Financial Corporation. The transaction, the terms of which were not disclosed, is expected to be completed during the fourth quarter of this year, pending regulatory approvals.
— Total assets at September 30, 2000 were $426 billion, compared with $396 billion at June 30, 2000 and $371 billion at September 30, 1999. Chase’s Tier One capital ratio was 7.9 percent at September 30, 2000, compared with 8.7 percent on June 30, 2000. The decline is due to the acquisition of Flemings. There were no repurchases of Chase common stock during the third quarter of 2000.
— On a managed basis, including securitizations, net credit losses were $541 million in the third quarter of 2000, down from $574 million in the second quarter of 2000 and down from $633 million in the third quarter of 1999. Consumer net charge-offs on a managed basis were $476 million, down from $482 million in the second quarter of 2000 and $531 million in the third quarter of 1999, primarily reflecting a decline in the credit card net charge-off ratio to 4.97 percent. Commercial net charge-offs in the third quarter of 2000 were $65 million, compared with $92 million in the second quarter of 2000 and $102 million in the third quarter of 1999. For the third quarter of 2000, total net charge-offs on a reported basis were $305 million, and the provision for loan losses was $305 million. The allowance for loan losses was $3.49 billion at the end of the third quarter of 2000, compared with $3.46 billion at the end of the second quarter of 2000. Nonperforming assets at September 30, 2000 were $1.82 billion, compared with $1.90 billion at June 30, 2000 and $2.02 billion at September 30, 1999.
— Operating results (revenues, expenses and earnings) exclude the impact of credit card securitizations, restructuring costs and special items. In the third quarter of 2000, special items included a gain of $53 million (after-tax) from the sale of a business in Panama, a loss of $23 million (after-tax) resulting from the economic hedge of the purchase price of Robert Fleming Holdings Limited prior to its acquisition, and the restructuring costs of $51 million (after-tax) associated with previously announced relocation initiatives. There were no special items in the third quarter of 1999. For the first nine months of 2000, special items included a loss of $115 million (after-tax) resulting from the economic hedge of the purchase price of Flemings prior to its acquisition, $83 million (after-tax) of restructuring costs associated with previously announced relocation initiatives, and the $53 million (after-tax) gain from the sale of a business in Panama. For the first nine months of 1999, special items included a $61 million (after-tax) gain on the sale of a building, a $46 million (after-tax) gain on the sale of branches in Texas, and a $65 million (after-tax) special contribution to The Chase Manhattan Foundation.
Chase, with $426 billion in assets, is one of the world’s premier financial services institutions, with operations in more than 50 countries around the world. Chase has top-tier rankings in many areas of investment banking, asset management, private banking, trading and global markets activities as well as information and transaction processing. Chase is a leading provider of financial solutions to large corporations, government entities, commercial banking clients, small businesses and individuals, and has relationships with more than 30 million consumers across the United States.
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