Wachovia Falls on Downgrade, CFO Exit

Wachovia(WB Quote) dropped nearly 10% Friday after an analyst downgrade and news its CFO was leaving.

Robert Patten of Morgan Keegan slapped a sell rating on the Charlotte, N.C.-based bank following its miserable second-quarter earnings results and concern that the company might have to raise more capital.

Wachovia reported a staggering second quarter loss $8.9 billion earlier this week and said it was cutting its dividend by 86% to 5 cents a share, among other things to preserve capital. Investors had reacted favorably to new CEO Robert Steel's first public comments as Wachovia's head when he said that the bank would not have to raise additional capital in light of the company's internal initiatives it was undertaking.

"We believe investors have become overly optimistic too soon, following comments that Wachovia does not need to raise common equity," Patten writes in a note on Friday. "We believe it is too early given the significant credit challenges ahead for Wachovia management, to make that call."

Of the southeastern U.S. banks he covers, Patten prefers SunTrust Banks(STI Quote) and First Horizon(FHN Quote).

"Both of these banks, while facing challenges, appear to be better positioned in terms of capital and reserves to manage through the current crisis with better earnings visibility in 2008," he writes.

Wachovia has had a mountain of bad news attached to it this year following its 2006 acquisition of California residential real estate lender, Golden West, as loans once thought to be relatively good quality have soured. Steel, a former undersecretary to the Treasury, was hired on July 9 -- little more than a month after longtime head Ken Thompson was ousted following the company's quagmire of mortgage problems.