Wachovia Sinks on Loss, Plans to Raise $7B

Wall Street analysts were surprised by the size of the capital raise and the earnings loss, weighing on shares. The stock closed down $2.56, or 8.1%, to $25.55. One analyst said the offering was nearly twice his estimates.

"Credit deterioration was worse than expected," writes Bob Patten, senior bank analyst at Regions Financial's Morgan Keegan. "While it appears that reserves and capital are being strengthened, it is unclear at this point where Wachovia is in dealing with its credit exposures. Golden West exposure continues to mushroom and inflows into nonperforming assets jumped ... as pick-a-pay, home equity and traditional mortgage continue to weaken." Patten rates Wachovia at market perform.

Moody's Investors Service affirmed its debt ratings for Wachovia and its bank subsidiary due to the capital raise, yet the ratings agency maintained its negative outlook on the company because of the "accelerated deterioration" in its option-ARM portfolio.

UBS analyst Matthew O'Connor estimates that Wachovia's capital raise will be "15% dilutive" to earnings, with Tier I capital rising to 9% from 7.5% currently.

Still, the "actions remove many immediate concerns and we see good value in the stock over the year," he writes in a note. O'Connor has a buy rating on Wachovia.

Standard & Poor's lowered its outlook to negative from stable on the banking company due to the expectation of lower operating profitability in the near term, it said.

Given the deterioration in February and March of Wachovia's mortgage portfolio, the bank tried to assess the extent of losses by not only looking at home price depreciation but consumer behavior. "That led us to the conclusion that credit costs were going to be higher in mortgage than we anticipated," Thompson said later in the call.

"We also had a desire to really try to take a view of the market going forward that was harsh enough [for us] to be prepared for whatever came along," Thompson added.

The bank decided to increase its provision expense. Given the company's capital ratios combined with the dour economic predictions, "we decided that raising capital was the right thing to do."

"And then we decided if we were going to raise capital then we were really going to raise capital," he said. "We think we've taken a harsh view of what could happen going forward and we've raised more capital than would be required to be very well capitalized."