Wachovia's Steel Soothes Street (Update3)

The Charlotte, N.C., bank's shares rebounded after its new CEO touted moves to cut jobs and slash its dividend to preserve capital.
Publish date:

Updated from 9:59 a.m. EDT.

Robert Steel,


(WB) - Get Report

new CEO, seems to have no qualms about diving head first into the mortgage-troubled bank's problems and assuaging investors that it would not have to raise additional outside capital.

Shares of the beleaguered Charlotte, N.C., bank were rising 7.4% Tuesday afternoon to $14.15, after Steel -- who

joined the bank

a little more than two weeks ago after serving as undersecretary of the Treasury -- said a common stock issuance was "not on the plan."

"We're raising lots of capital by reducing the dividend, managing our expenses and running our businesses better and that's the plan for now," Steel said on a conference call with analysts Tuesday morning.

Shares had been plunging more than 9% Tuesday morning after the troubled bank posted an $8.9 billion, or $4.20 a share, second-quarter loss and slashed its dividend by 86% to 5 cents a share. The bank also cut 10,750 positions and said it has decided to exit the wholesale mortgage origination channel, among other things.

Things turned around for the stock after Steel said the company has "taken what we believe are some really clear and instantly measurable steps," in deciding to cut the dividend and outlining plans that "that we believe will give us a substantial improvement in our capital ratios."

"We have other levers should those not be enough, but I think you can hopefully hear the determination to work through this situation and -- to the very best of our ability -- be thinking about what's best for our shareholders," he added.

Steel, who worked with Treasury Secretary Henry Paulson at

Goldman Sachs

(GS) - Get Report

prior to his government service, was named to Wachovia's top job on July 9. The move came a little more than a month after the company ousted its longtime CEO Ken Thompson, amid rising credit losses, particularly in its $120-billion option-ARM portfolio, which it inherited from Golden West.

Wachovia's second-quarter loss included a $6.1 billion non-cash goodwill impairment charge in commercial-related sub-segments reflecting declining market valuations and asset values. Wachovia said the goodwill impairment charge has no impact on its tangible capital levels, regulatory capital ratios or on liquidity.

Excluding the goodwill impairment charge and a merger and restructuring expense of $128 million, Wachovia posted a net loss of $2.67 billion, or $1.27 per share.

The company also took a $5.6 billion provision to cover net charge-offs and increase the reserve by $4.2 billion, it said.

Wachovia said it generated revenue of $7.5 billion, excluding the goodwill impairment and other items that contributed to the quarterly loss.

To preserve capital, the bank said it has already reduced its mortgage employee headcount by 2,000 through June, and plans to cut 4,400 employees in its mortgage segment over the next year, according to presentation slides.

Wachovia said the dividend cut, the second one in three months, will conserve roughly $700 million of capital each quarter.

The company also said it has outlined additional initiatives "ranging from reducing expense growth and capital expenditures, reducing earnings assets, repositioning the certificate of deposit book and generating further growth in low-cost core deposits and other deposits."

Wachovia is also reducing the number of "credit-only" commercial borrowers and looking to sell certain "non-core assets," it says.

Amid severely declining home prices, Wachovia had said last quarter that it would cease originating the controversial negative amortization option for the Pick-a-Pay mortgage product, which was the main product of Golden West, which it acquired in 2006.

"In the short term, the entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position, and reducing risk," Steel said in a statement accompanying the earnings release. "The actions taken and the initiatives under way are expected to generate or preserve more than $5 billion in capital. We ended the quarter with approximately $50 billion in regulatory capital and a Tier-1 ratio of 8%, and we will be intensely focused on improving that level between now and the end of 2009."

Wachovia, along with other banks including

Washington Mutual

(WM) - Get Report

, have already looked to the public markets to raise capital. The company, in April, raised $7 billion through a common stock issuance. Analysts and investors will be listening to hear whether the company discusses the need for further capital raises on its conference call this morning.

Standard & Poor's, Moody's and Fitch Ratings downgraded their ratings on Wachovia's debt following the poor earnings results.

Wachovia's wide miss of Wall Street's expectations comes in contrast to the upside surprise offered by several of its large, national rivals in the past week.

JPMorgan Chase

(JPM) - Get Report



(C) - Get Report


Wells Fargo

(WFC) - Get Report


Bank of America

(BAC) - Get Report

all beat the Street's meager expectations.

"There is no question that given the cycle in where we are that credit costs will rise as you would expect given these conditions," Steel said during the call. "In summary, we at Wachovia understand our issues and challenges, We are already addressing them and we will be taking further actions period. We believe are facing up to and are realistic with regard to the realities of housing and its expected deterioration. ... We are committed to a strong balance sheet and protecting and creating shareholder value."