Venture capital investing was the problem child of bank earnings Wednesday, but that didn't keep J.P. Morgan Chase (JPM) - Get JPMorgan Chase & Co. (JPM) Report and FleetBostonundefined from acting like devoted parents.
Now investors and analysts are wondering how many more quarters of trouble there will be before the business starts to behave.
Both banks sought to downplay the weakness, describing it as temporary, but experts were skeptical. "Is the worst behind us?" asked UBS Warburg banks analyst Michael Plodwick, noting Fleet's venture capital performance, where weakness cut earnings by about $290 million, or 27 cents a share.
Plodwick says despite Fleet's having taken a "kitchen sink" approach to the principal investing portfolio this quarter, his expectations for the business are "a very modest rebound off depressed levels" in the early part of 2002. (His firm hasn't done recent underwriting for FleetBoston.)
J.P. Morgan took $1.02 billion of writedowns, mostly in its privately held telecom investments, while FleetBoston wrote down $290 million of its $4 billion portfolio, a substantial portion of which was also telecom-related. Despite the consensus among analysts that the banks are taking an aggressive stance on valuations, many are wondering how much longer the writedowns and losses will persist.
"The private-equity portfolio has repeatedly been a concern for J.P. Morgan, and this quarter it cost the firm 30 cents from the bottom line," Goldman Sachs analyst Richard Strauss wrote. (His firm has not performed any recent underwriting for J.P. Morgan Chase.)
Indeed, today's poor results at J.P. Morgan mark the third time in four quarters that the bank has been hurt by its plunge into high-tech and emerging-growth investments. The bank said nearly 85% of the writedown was related to telecom investments in its privately held portfolio that were made in 1999 and 2000, sparking analyst criticism that the bank took on too much risk.
During J.P. Morgan's conference call today, one analyst asked, "How much confidence can you give us that the worst is over, or should we be looking for more at this point?" Vice Chairman Marc Shapiro sought to assure investors that the "real issue for us was investments made in the last two years at higher valuations."
Some say the bank should have known better. "We would expect more seasoned corporate financiers to avoid the mania of the masses, but maybe that's too much to expect," said David Hendler, financial services analyst at CreditSights.com. "While management did say it could have been more diversified in its venture capital concentrations -- much less than 30% in telecommunications -- it did not accept the responsibility that it got too caught up in the speculative venture capital mentality."
Of course, asking analysts or the bank itself how much longer the weakness will continue prompts quips about murky crystal balls on the direction of the market. The VC business is a "pure reflection of the market conditions and the lack of liquidity," says Christopher Mutascio, banks analyst at Legg Mason in Baltimore.
On a more positive note, says Mutascio, while it's impossible to predict what valuations will be in coming months: "They did
the writedowns now and they took their lumps. I don't know if it necessarily sets them up for future gains, but it alleviates some of the negative."
Both J.P. Morgan Chase and Fleet reiterated their commitment to venture investing. And J.P. Morgan Chase recently committed $8 billion of its own capital to a $13 billion fund it is raising. "This is the time to invest ... and take advantage of inefficiencies in the marketplace," said Geoffrey Boisi, co-chief executive of the firm's investment banking unit. "It's a bad time to sell. People selling today are selling under distress."
But not everyone agrees. Strauss of Goldman, who cut estimates for this year and next, says, "The company's shares trade at 12.4 times our revised 2002 estimates, a 5% discount to the group, not significant enough given the volatility of JPM, and the potential likelihood of future writedowns."