PNC Financial Services Group Inc. is certainly not alone with big second-quarter writedowns in its venture capital investments, but it is hatching a plan to make sure they do not come up again.
On Thursday, the Pittsburgh-based banking company reported a 6.3% drop in profits, to $295 million or $1 a share, 8 cents below Wall Streets expectations because of a $22 million net loss in its venture capital portfolio.
The company is reviewing the business and might restructure it or fold it into its asset management unit. I am optimistic that this is not going to be a problem in the future, chief executive officer James E. Rohr said in an interview Thursday.
A spokesman for the company said PNC is looking into strategies that would reduce the volatility of the revenue stream in the venture capital unit. Options include establishing a fund in which PNC would be but one investor and reap fee income by managing it or moving assets off PNCs balance sheet and securitizing them.
Private equity has tripped up a number of banking companies recently, with steep second-quarter declines at J.P. Morgan Chase & Co., FleetBoston Financial Corp., and Wells Fargo & Co.
PNCs venture capital woes fall in line with others, said Michael Plodwick, an analyst at UBS Warburg. If you look at what other banks have done, [a venture capital loss] seems to be the thing to do this quarter, he said.
Mr. Rohr attempted to put a positive spin on the situation, pointing out several second-quarter highlights. PNCs fixed-income intensive asset management unit, BlackRock, and its mutual fund and securities processing unit, PFPC, reported earnings growth of 26% and 50%, respectively.
When you look at the landscape, we delivered a solid quarter, minus venture capital, he said.
Still, some analysts lowered their outlook on the belief that PNC will not benefit from a quick rebound in capital markets. Jennifer Thompson, an analyst at Putnam Lovell Securities Inc., lowered her earnings estimates for 2001 and 2002 from $4.38 and $4.90 to $4.25 and $4.70, respectively. Lori Appelbaum at Goldman Sachs & Co. lowered her 2002 estimate by 20 cents, to $4.75.
Core earnings at PNCs regional community banking unit grew 10% compared with the same period a year ago, aided by a boost in transaction deposits. Mr. Rohr emphasized this diversification. We have a series of businesses that can grow, he said.
He said that the decision by hometown rival Mellon Financial Corp. to sell its Middle Atlantic consumer, small-business, and some mid-market banking operations to Citizens Financial Group Inc. will help PNC. We are pretty excited about the transaction, he said. We have a terrific marketing opportunity.
Shares of PNC fell 0.4%.
UnionBanCal Corp. said late Wednesday that it had second-quarter profits of $117.2 million, down 17% from last year. But earnings per share, excluding certain charges, were 74 cents, beating estimates by 4 cents.
The San Francisco-based banking company, majority owned by Bank of Tokyo-Mitsubishi Ltd., has been beset by bad loans. Nonperforming assets rose 5% from the first quarter, to $460 million, and were more than double from the second quarter of last year.
The company said that it was making progress, however. In April it stopped originating car loans. Earlier this month new management was installed at Union Bank. Departing chief executive Takahiro Moriguchi returned to Japan and was succeeded by Norimuchi Kanari.
The strategy we have employed to address problem loans is having positive results, Mr. Kanari said in a release. We have adopted more selective underwriting criteria, have renewed our focus on core lending competencies, and have exited non-core lending segments and loans.
Revenues fell 2.2%, to $547.7 million, as net interest income declined 4%. Fee income rose 3.3%, to $168.4 million.
Shares of UnionBanCal fell 2.5%.
Liz Moyer contributed to this report.