Wells Fargo Joins J.P. Morgan in VC Writedown Club
It's D-Day, all right: Deficit Day in banks' technology portfolios.
A
warning about private equity losses at
J.P. Morgan Chase
(JPM) - Get Report
was followed by an even bigger surprise from
Wells Fargo
(WFC) - Get Report
late Wednesday. The San Francisco-based bank expects to take a hefty $1.13 billion charge against second-quarter earnings, largely due to writedowns in its venture capital unit. Wells fell 93 cents to $47.84 ahead of the announcement.
Unlike J.P. Morgan, which
hasn't exactly been a stranger to the ups and downs of venture capital investing, Wells Fargo's portfolio has performed consistently well up to now. But like most banks that wanted in on the tech-stock boom, Wells has seen the once-lucrative business fall on hard times: Wells reported venture capital gains of $17 million in the first quarter, which pales in comparison with the $885 million year-ago venture capital profit.
Of the second-quarter charge, the bank said $1.05 billion, or 61 cents worth, would result from writedowns to the venture capital portfolio. Most of the remaining 4 cents will come from fine-tuning the value of Wells Fargo's auto-leasing portfolio. That $90 million charge had been previously announced.
Chief Financial Officer Ross Kari said the bulk of the private equity charge comes from reducing noncash gains recognized in late 1999 and 2000. The gains were the result of acquisitions of several of the companies held in the portfolios by publicly traded companies. Examples, he said, included
Cisco's
(CSCO) - Get Report
acquisition of
Cerent
in late 1999, and
Redback Networks'
(RBAK)
purchase of
Siara Systems
.
To its credit, Wells Fargo has a long track record of double-digit returns in venture capital. CEO Richard Kovacevich said in a statement that even including the writedowns, "recent returns on our venture capital and equity investments were significantly above our historical averages." Kovacevich added that the bank expects returns to be above the minimum hurdle rate of 20% in the years ahead.
Joe Morford, banks analyst at
Dain Rauscher
, said that on a better note, the bank's core operating earnings are still quite healthy. He does not expect to make adjustments for full-year or future-quarter estimates, he said. (He rates Wells Fargo a strong buy, and his firm has not done any recent underwriting for the bank.)