Bad debts on loans receivable
Excerpts from the 2008 Annual Report for J.P. Morgan Chase & Co. (“JPMC”) are provided in
Note that the balance in the allowance for loan losses account at the end of JPMC’s fiscal 2006 was $7279 million and the balance in their loan asset account was $483 127 million at the same date.
Required
(a) Calculate JPMC’s allowance for loan losses as a percentage of gross loans outstanding for each of the three years for which information has been provided.
(b) What is the dollar value of JPMC’s loan write-offs in 2007 and 2008?
(c) Comment upon JPMC’s loan loss provisioning over the periods shown. Do they appear to have used the provision to create hidden reserves? Are they sitting on a “cookie jar” reserve or are you expecting a big hit to the income statement in future periods as a result of past underprovisioning for bad loans?