Review of financial performance 2003
Wholesale Banking reported cash basis net income of $363 million in 2003 compared with a net loss of $657 million in 2002. Return on average invested capital was 8.2% compared with (16.1)% last year. Economic loss was $193 million in 2003 compared with $1,192 million in 2002. The improved performance in 2003 is primarily a result of the significant reduction in credit losses as compared with 2002, but includes a $289 million after-tax charge for the restructuring and goodwill impairment of the equity options business and the effects of running off the non-core portfolio.
Wholesale Banking revenues are derived primarily from corporate banking, investment banking and capital markets and investing activities. Revenues declined 18% from 2002 to $2,177 million. The non-core portfolio incurred losses on asset sales and derivative positions of $113 million. Capital markets revenues, which include advisory, underwriting, trading, facilitation and execution services businesses decreased by $198 million compared with 2002. This was largely a result of reduced trading revenue from our structured products businesses.
Provisions for credit losses reversed from a $2,490 million charge in 2002 to an $80 million release of sectoral allowances in 2003. The 2002 allowance included $1,450 million of sectoral provisions relating to loans in the non-core portfolio. The sectoral allowance balance was $541 million at the end of 2003, compared with $1,285 million at the end of 2002. No credit losses were incurred in the core lending portfolio in 2003.
Non-interest expenses increased 43% to $1,761 million in 2003. The equity options business restructuring charge and goodwill write-off in 2003 had a combined impact of $422 million. The remaining increase includes costs of streamlining the core operations in Wholesale Banking, charges for systems write-offs, real estate downsizing and a legal provision in the non-core portfolio and higher variable compensation expenses compared with 2002.
Fiscal 2003 was a very satisfying year for Wholesale Banking. We repositioned the business to focus on our core strengths and strategy to deliver consistent lower risk earnings, implemented stricter limits around credit exposures and industry concentrations, and reduced the non-core lending portfolio with no additional negative impact on earnings.
Review of financial performance 2002
Financial results for 2002 were adversely affected by weak credit conditions and a strained operating environment resulting from heightened investor concerns over corporate governance issues and lingering geopolitical risks. On a cash basis, Wholesale Banking reported a net loss of $657 million in fiscal 2002 compared with net income of $926 million in the prior year. The decline was due primarily to an increase in provisions for credit losses, which had an after-tax impact of approximately $1,400 million. Significant declines in trading volumes, deterioration in equity markets, widening credit spreads and weak corporate activity led to lower revenues in 2002. Total revenue was $2,668 million, a decline of $495 million or 16% from revenues of $3,163 million in 2001. Provisions for credit losses rose sharply to $2,490 million in 2002, a $2,163 million increase from $327 million in 2001. The increase was mainly related to significant credit deterioration in the telecommunications and utility sectors, exposures to companies impacted by malfeasance and the fallout from the political instability in Argentina. During fiscal 2002, we established $1,450 million of sectoral provisions related to loans in the non-core portfolio. At the end of fiscal 2002, we had drawn down $185 million of the sectoral allowance to establish specific allowances. Cash basis expenses of $1,235 million in 2002 were $138 million below 2001 expenses of $1,373 million. The decline in expenses was driven by lower variable compensation, offset partially by additional investment in technology and risk management.