Wachovia Sinks on Loss, Plans to Raise $7B
Updated from 2:22 p.m. EDT
Wachovia
(WB) - Get Report
shares sank as much as 11% Monday, after the bank said it was raising $7 billion through a stock offering and cutting its dividend, while swinging to a big first-quarter loss.
Wachovia, which has been hobbled in the credit crunch since last summer due to its acquisition of option adjustable rate mortgage specialist Golden West near the height of the housing bubble in 2006, reported a loss of $393 million, or 20 cents a share, vs. a profit of $2.3 billion, or $1.20 a share in the year ago period. Analysts polled by Thomson Financial had expected a profit of 40 cents a share.
The Charlotte-based bank blamed the loss on higher credit costs and "continued disruption in the capital markets." As a result, the bank commenced concurrent offerings of common and preferred stock totaling $7 billion. It also slashed its quarterly dividend by 41% to 38 cents a share, which it said will preserve another $2 billion in capital annually.
Wachovia Walloped, Blockbuster Baffles |
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Wachovia said the proceeds from the sale of common and preferred stock would be used for general corporate purposes. The bank said the money will increase capital ratios and provide flexibility. CEO Ken Thompson said in a company press release that he was "extremely pleased" with the level of interest from investors so far.
"I know these actions are not without cost and I wish these actions were not necessary, but they are," Thompson said during a conference call to discuss the capital raise and earnings.
As the housing market worsens and the credit crisis deepens into mortgages beyond subprime consumers to include prime borrowers and commercial real estate, banks large and small are seeking capital infusions to brace themselves against further loan losses. Last week,
Washington Mutual
(WM) - Get Report
said that a consortium of investors led by TPG would
into the struggling thrift.
Midwest banking outfit
National City
(NCC)
is also said to be looking at a private capital injection or potential sale.
Wachovia acquired California mortgage lender Golden West in 2006. The lender was best known for originating Option ARMs, in which borrowers could choose one of several payment options. But the housing market has soured since the purchase, particularly in California.
While Wachovia has acknowledged that it expects to see increased losses there, management has been predicting the losses to be muted given the better underwriting standards at Golden West. Still,
.
The bank increased its provision for credit losses to $2.83 billion in the quarter, from $177 million in the year-ago quarter "largely reflecting more severe deterioration in the residential housing market, particularly in specific markets in California and Florida," it said.
Wachovia said approximately $1.1 billion of the reserve build was specifically for potential losses in its $121 billion option ARM mortgage portfolio. Actual loans charged off in the first quarter totaled $765 million.
"The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses," Thompson said in a separate release, in which he said he was "deeply disappointed" in the bank's quarterly results.
Wachovia also took mark-to-market writedowns of $2 billion on its structured securities portfolio in the latest quarter, fueling the company's $77 million loss in its corporate and investment bank compared to a profit of $550 million in the first quarter of 2007.
Wachovia had $339 million of market valuation losses in its subprime residential asset-backed collateralized debt obligations, compared to $818 million in the fourth quarter. It also had another $521 million of losses in its commercial mortgage structured products and $251 million of losses in the consumer mortgage-backed products. Additionally Wachovia recorded $309 million of losses in leveraged finance loans, net of fees, among other things.
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."