Wachovia reports $9 billion loss

Nation's No. 4 bank misses analysts' forecasts and cuts dividend, but insists it is adequately capitalized.

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NEW YORK (CNNMoney.com) -- Wachovia Corp. posted a nearly $9 billion loss for its second quarter Tuesday on losses related to home mortgages and the bank's declining market value.

The shortfall exceeded the estimates of Wall Street analysts, but shares rose 27% after falling in early trading.

The nation's fourth-largest bank reported a net loss for the three months ended June 30 totaling $8.9 billion, or $4.20 per share, compared with a profit of $2.34 billion, or $1.22 per share, a year earlier.

Excluding a one-time, $6.1 billion charge related to "declining market valuations," the Charlotte, N.C.-based bank said it lost $2.67 billion, or $1.27 per share. Analysts polled by Thomson Financial, which typically excludes one-time items from their estimates, were expecting a loss of 78 cents per share.

It was the second-consecutive quarterly loss for Wachovia, marking the first time the bank reported back-to-back losses in 20 years. Some analysts think the bank's continued weak performance may make it an attractive purchase for a bigger company.

"Wachovia as an asset will be an attractive takeover, especially since they took a pretty big write-down, so they're closer to a clean slate." said Eric Schopf, portfolio manager with Hardesty Capital Management. "Investors are seeing that now and that's driving up the stock."

Revenue for the quarter fell 13.7% to $7.5 billion from $8.69 billion last year. That missed analysts' forecast of $8.37 billion in revenue.

"These bottom-line results are disappointing and unacceptable," Lanty L. Smith, Wachovia's board chairman said in a statement. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."

The bank did not give any specific guidance in its report, but it signaled that the outlook wasn't rosy, with a continued difficult economic climate and falling home prices in the future.

"We are being prudently paranoid," said Wachovia chief executive Robert Steel on a conference call with analysts. "We understand our issues and challenges, and we are already addressing them."

New game plan

Wachovia pre-announced its loss when it named former Treasury undersecretary Steel its new chief executive on July 9, so the numbers should not have come as a surprise to analysts. Prior to that announcement, analysts were expecting Wachovia to post a profit.

"We already knew this was going to be a bad quarter, so the new CEO is trying to put a fence around the bad stuff," said Kevin Fitzsimmons, analyst with Sandler O'Neill & Partners. "This is Steel's only chance to get all the bad news out there and take dramatic steps before his honeymoon period is over."

Accordingly, the company outlined two new measures to return to profitability. First, it cut its quarterly dividend to 5 cents per share from 37.5 cents. It was the second straight quarter in which it slashed its dividend, though this was a much more severe cut than in the first quarter.

"As we consider the company's position, it is clearly prudent and necessary to further reduce our common dividend," said Steel. "While this is a difficult decision, it is the best course for our shareholders over the long term."

The bank also reiterated a plan announced Monday that it plans to leave the wholesale mortgage lending business by the end of the week. It will no longer offer mortgages through brokers, and it will cut a total of 6,350 jobs.

Analysts said the bank took appropriate and necessary action.

"They can't just say they're fine and then raise capital later - [former CEO] Ken Thompson already did that," said Fitzsimmons. "They needed to cut their dividend and raise capital this quarter."

As the housing market deteriorates further with no imminent signs of recovery for the U.S. economy, many financial institutions have set aside more cash to compensate for bad loans.

Likewise, Wachovia said it added $5.6 billion to its loan loss reserve, $1.4 billion of which covered net charge-offs. The bank said it expects home prices to fall another 14%.

But the company insisted it is adequately capitalized, with a tier 1 ratio of 8%. The tier 1 ratio is a measure of a bank's capital. Most analysts agree that a bank with at least an 8% tier 1 ratio is adequately capitalized.

"Wachovia's new management has pulled its head of out the sand and is fully acknowledging the problems it faces with the loss provision," said Bart Narter, senior analyst with financial research firm Celent. "The bank is making changes in its business to contain these losses."

Steel said the bank will be able to generate or preserve more than $5 billion of capital by cutting its dividend.

"Our balance sheet and liquidity position are strong, and we are committed to keeping them that way," said Steel. "We will be intensely focused on improving that [tier 1] level between now and the end of 2009."

Still reeling from loan losses

Wachovia is still ailing from its ill-timed 2006 acquisition of California mortgage lender Golden West Financial Corp, which offered so-called "Pick-a-Pay" loans that allowed customers to pay less than the full interest payment on new mortgages. When the housing bubble burst shortly after the buyout of Golden West, many homeowners with the special loans defaulted.

The bank posted a surprising $708 million loss in the previous quarter and announced plans to raise $7 billion in capital through the sale of common and preferred stock.

In June, former CEO Ken Thompson became the latest casualty of the credit crunch when he stepped down under pressure from the bank's board.

Wachovia (WB, Fortune 500) has been the subject of much analyst scrutiny in the weeks leading up to its report, most notably from influential banking analyst Meredith Whitney of Oppenheimer & Co. Whitney said the bank will face its "greatest reckoning" in the coming quarters due to surging credit costs.

Last Thursday, regulators from several states inspected documents and records in the company's St. Louis headquarters. Regulators searched the Wachovia Securities unit, which is tied to the company's auction-rate securities sales.

Wachovia's quarterly report follows those of peers Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), JPMorgan (JPM, Fortune 500), and Wells Fargo (WFC, Fortune 500), all of whom reported hefty losses or declines in profit, but still managed to beat analysts' expectations. To top of page

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