| Principal Mortgage May Be On the Block
Possible sale follows massive write down March 9, 2004 By PATRICK CROWLEY
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| On the heels of a quarterly loss and massive write down, Principal Financial Group may be ready to shed its mortgage banking and servicing business.Word among equity analysts and industry watchers is that Principal, a diversified financial services company based in Des Moines, Iowa, is already shopping its Principal Residential Mortgage unit.
No potential suitors have emerged publicly. Principal spokeswoman Tina Marchetti said in a brief interview that she could not comment on the rumors of a sale or on the company’s plan for the mortgage unit. But in a Feb. 25th research report prepared by Credit Suisse First Boston Equity Research, a top Principal Financial Group executive raises the possibility of a sale. The report — drafted by analyst Thomas Gallagher and Kevin Feder — features a discussion of the company’s plans with John Aschenbrenner, head of Principal’s mortgage banking division. “Although a potential sale of the mortgage banking business does not appear imminent, we think a sale over the next year to 18 months is likely,” Credit Suisse said, according to a written copy of the report. “On the topic of a potential sale of all or a piece of its mortgage banking business, Mr. Aschenbrenner was very clear in indicating that the business was ‘non-core’ and if the right deal came along (Principal) would consider” selling, the report states. “He expects that as the refinance boom ends and large mortgage companies search for growth, there should be a picking up in interest to acquire servicing portfolios,” it said. A sale could boost the company’s stock “and we believe the company would withstand 10% earnings dilution and still enhance shareholder value,” the firm said in the report. According to Principal’s fourth quarter earnings report, the mortgage banking unit lost $42.8 million compared to earnings of $29.1 million for the fourth quarter of 2002. “The company took a write-down of its mortgage servicing rights asset in the fourth quarter, reflecting currently available external indicators of market value,” the company said. “The after-tax impact of this write-down was $87.1 million, or 27 cents per diluted share.” Despite the loss and write-down, Standard & Poor’s Ratings Services (S&P) has not changed its ‘A’ and ‘AA’ ratings of the company’s units or its stable outlook for the company has a whole. “The MSR (mortgage servicing right) asset write-down is not completely unexpected given the fluctuating nature of the valuation of an MSR asset and (Principal Residential Mortgage Inc.’s) above-average MSR valuation relative to industry peers,” S&P said in a report issued in December, just prior to the release of Principal’s earnings. S&P also said it does not expect any additional write-downs and that earnings should be good in 2004, “although not as robust as in 2001 and 2002 due to decreased refinancing activity.” Credit Suisse said that to improve the negative perception of its mortgage business, Principal “could sell its excess servicing fees, which would lower its (MSR) capitalization rate closer to peers and prove to investors that an additional MSR write-down is not required.” At year end Principal’s mortgage servicing portfolio was $118.7 billion, compared to $117.8 billion at the end of the 2003 third quarter, the company said. Fourth quarter loan production dropped from $16.5 billion in 2002 to $7.9 billion last year, according to the company’s earnings report. |
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Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com |
