$8.9 billion loss at bank spurs cuts
Posted on Wednesday, July 23, 2008
Wachovia Corp. Chief Executive Officer Robert Steel plans to cut $ 2 billion of expenses by the end of next year and sell parts of the fourth-biggest U. S. bank after posting a record quarterly loss, slashing the dividend 87 percent and eliminating 6, 350 jobs.
Wachovia rose as much as 13 percent in New York trading Tuesday on optimism that Steel, the U. S. Treasury official hired two weeks ago, can stem damage from the worst housing market since the Great Depression. The Charlotte, N. C.-based company posted a second-quarter loss Tuesday of $ 8. 9 billion, or $ 4. 20 a share, more than it has ever earned in an entire year.
The loss included a $ 6. 1 billion charge tied to declining asset values. The write-down, job cuts and second dividend reduction in three months come two years after Wachovia spent $ 24 billion to buy Golden West Financial Corp. just as home prices were peaking. That purchase cost for- mer CEO Kennedy Thompson his job after eight years.
“We’re serious about getting on top of these issues quickly,” Steel, 56, said during a conference call with investors Tuesday. He described the bank’s attitude as “prudently paranoid.” Wachovia shares have declined more than 60 percent this year, the second-worst performance in the 24-company KBW bank index behind National City Corp., Ohio’s largest bank. The stock rose $ 3. 61, or 27. 4 percent, to close at $ 16. 79. Fitch Ratings cut Wachovia to A + from AA-, citing its mortgage business; Moody’s downgraded the bank to A 1 from Aa 3; and Standard & Poor’s reduced its rating to A + from AA-.
Wachovia, whose job cuts amount to about 5 percent of the bank’s work force, lowered the dividend to 5 cents a share from 37. 5 cents and will leave 4, 440 positions open. Steel said the company is moving to “sell selected noncore assets” and reduce the number of business customers who use the bank only for loans rather than other services. Wachovia expects to cut expenses during the second half of this year by $ 490 million and then reduce 2009 spending by $ 1. 5 billion.
“Steel is clearly trying to get his arms around this,” said Joseph Gordon, president of Gordon Asset Management in Durham, N. C., which owns Wachovia shares and manages more than $ 200 million. Even so, “we aren’t advising any clients to buy until they fess up and go full transparency on Golden West and their commercial lending problems.” The loss marks the first time Wachovia has posted consecutive losses in at least 20 years, data compiled by Bloomberg show. Wachovia’s report follows the release of better-than-estimated quarterly results at JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
Steel declined to identify assets that may be sold, saying in a conference call with analysts, “I admit to being a bit evasive” on the issue. He added that Prudential Financial Inc. probably won’t sell its 23 percent stake in the bank’s securities unit, a holding that some value at as much as $ 5 billion. Prudential can exercise an option under a 2003 agreement to force Wachovia to buy the stake.
Wachovia’s goodwill-impairment charge didn’t include its Golden West business, “due to the value of the retail banking franchise,” the company said. The impairment included $ 4. 5 billion in reduced value of commercial loans, plus $ 597 million in investment-banking assets.
Wachovia said July 9 that losses in the three months ended June 30 would be at least $ 2. 6 billion, after $ 3. 3 billion of losses on option-adjustable-rate mortgages. The loans let borrowers skip part of their payment and add the balance to principal. The bank said last month that it stopped offering the mortgages.
Declining house prices in California and Florida, which account for about 70 percent of Golden West’s $ 121 billion of loans, have left 14 percent of the bank’s option-ARM customers with zero or negative equity in their homes. Merrill Lynch & Co. analyst Edward Najarian estimated July 9 that losses from the loans would total about $ 18 billion over four years, double those previously estimated by Wachovia.
The outlook for housing worsened in the second quarter, Wachovia said. Twenty-five metropolitan areas account for 90 percent of the option-ARM historical losses, with 22 of those markets in either California or Florida, the bank said. The exceptions include Washington, D. C.; Phoenix; and Las Vegas.
Profit at the division that includes retail, small-business and commercial customers fell 23 percent to $ 1. 12 billion. Growth in new checking accounts slowed from the previous quarter.
The corporate and investment bank earned $ 209 million, compared with $ 779 million a year earlier. Wachovia has announced 500 job cuts at the unit this year as demand wanes for packaging home loans into securities and advice on mergers.
Earnings at the capital-management subsidiary fell to $ 297 million from $ 312 million. The unit includes the A. G. Edwards Inc. brokerage acquired last October and the Evergreen asset management company.
In addition to Golden West, Thompson, 57, was criticized by shareholders after Wachovia was forced to pay as much as $ 144 million to settle complaints that it failed to police telemarketers and payment processors who looted customer accounts. The bank also reported a $ 975 million charge because of a tax court ruling involving leasing transactions.
Wachovia’s securities division was inspected last week by regulators from more than five states who delivered subpoenas as part of an investigation into the company’s sales of auction-rate bonds.
Wachovia’s Tier 1 capital ratio — a benchmark regulators use to monitor a lender’s ability to withstand loan losses — rose to 8 percent from 7. 42 percent at the end of the first quarter. The minimum for a “well-capitalized” rating from U. S. regulators is 6 percent. Information in this article was contributed by Erik Schatzker of Bloomberg News.
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