2003 Annual Report: Financial Review: Management's Discussion and Analysis: Trading-related Revenue

Trading account profits represent the net amount earned from our trading positions, which include trading account assets and liabilities as well as derivative positions and mortgage banking certificates. Trading account profits, as reported in the Consolidated Statement of Income, do not include the net interest income recognized on trading positions or the related funding charge or benefit.

Trading account profits and trading-related net interest income (trading-related revenue) are presented in the following table as they are both considered in evaluating the overall profitability of our trading activities. Trading-related revenue is derived from foreign exchange spot, forward and cross-currency contracts, fixed income and equity securities, and derivative contracts in interest rates, equities, credit, commodities and mortgage banking certificates.

Table 3 Trading-related Revenue(1)
(Dollars in millions)			2003				2002				2001
Net interest income
(fully taxable-equivalent basis)		$	2,214			$	1,976			$	1,609
Trading account profits(2)			409				778				1,842
Total trading-related revenue		$	2,623			$	2,754			$	3,451
Trading-related revenue
by product
Fixed income		$	1,195			$	811			$	992
Interest rate (fully taxable-
equivalent basis)			897				832				792
Foreign exchange			549				532				532
Equities(3)			359				401				901
Commodities			(47	)			94				165
Market-based trading-related revenue			2,953			$	2,670			$	3,382
Credit portfolio hedges(4)			(330	)			84				69
Total trading-related revenue		$	2,623			$	2,754			$	3,451
(1)  Certain prior period amounts have been reclassified to conform to current period presentation. (2)  Includes $83 transition adjustment net loss in 2001 recorded as a result of SFAS No. 133   "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). (3)  Does not include commission revenue from equity transactions. (4)  Includes credit default swaps used for credit risk management.

Trading-related revenue decreased five percent to $2.6 billion for 2003 as compared to 2002 as the $238 million increase in net interest income was more than offset by a $369 million decrease in trading account profits. The 2003 increase in fixed income trading-related revenue of $384 million was a result of stronger product origination and distribution flow, in support of investor demand. Driving these results were increased profits in high-yield securities of $283 million and mortgage-backed securities of $23 million. The increase in interest rate trading-related revenue of $65 million was a result of a general increase in trading profits within our strategic trading platform. The $414 million decrease in revenues from our credit portfolio hedges was a result of credit spreads continuing to tighten as overall credit quality improved. This was the primary driver of the decrease in overall trading account profits for 2003 compared to 2002. Another driver of the decrease in trading-related revenue was the $89 million loss in the commodity portfolio associated with the adverse impact on jet fuel prices from the outbreak of Severe Acute Respiratory Syndrome (SARS) in the second quarter of 2003.