Bad bet on mortgages hurts Wachovia

Wachovia to cut jobs, seek cash; its woes foretell poor earnings by rivals

CHARLOTTE -- Wachovia is getting a lesson: Timing is everything.

The nation's fourth-largest bank reported a $393 million first-quarter loss and has decided to cut its dividend and seek a $7 billion cash injection -- by selling stock -- to make up for a poorly timed expansion of its mortgage business.

Wachovia said it plans to cut 500 jobs in its corporate and investment bank.

"I'm deeply disappointed with our first-quarter results," chief executive Ken Thompson told analysts Monday during a conference call. "I know these actions aren't without cost. I wish they weren't necessary, but they are."

It's the second time this year the bank, which is based in Charlotte, has gone to the well for cash, a move analysts say more banks large and small will do to brace themselves against loan losses.

"This isn't surprising, and we'll see more of it," said analyst Donn Vickrey of Gradient Analytics in Scottsdale, Ariz.

The housing market is expected to worsen and the credit crisis to deepen, affecting mortgages aside from subprime consumers, to include even prime borrowers and commercial real estate.

Vickrey said others such as struggling Midwestern bank National City and regional bank holding company Chemical Financial are at risk for an earnings miss because of the rate of growth in nonperforming loans and charge-offs.

Even larger outfits, such as Citigroup, the No. 1 U.S. bank by assets, may have to raise more cash by selling additional stakes in themselves to outside investors or by slashing their dividends.

Last week, Washington Mutual, based in Seattle, said that a consortium of investors led by TPG would invest $7 billion in the struggling thrift.

"What you're seeing is a taste of things to come," said Len Blum, managing director at Westwood Capital and former managing director of Prudential Securities' investment banking group.

Not so golden

Wachovia's troubles with the housing slump have been compounded by its 2006 acquisition of Golden West Financial of California, a $25 billion deal whose timing, Thompson has acknowledged, "was not the best."

"With the benefit of hindsight, it is clear that the timing was poor for this expansion in the mortgage business," Thompson wrote in a letter to shareholders in February.

But in an interview Monday, Thompson reaffirmed Wachovia's commitment to the mortgage industry, saying "we see mortgage as a big opportunity for us."

"We think it's a market that's going to be dominated by a few large banks, and we see Wachovia being a player in that," Thompson said.

Golden West's loans were concentrated in California, one of the hardest-hit housing markets in the United States.

Wachovia said this month that it was considering halting the making of loans, including its signature Pick-A-Payment mortgage loans, in 17 California counties heavily affected by falling home prices and rising foreclosures.

Last week, it announced a new set of lending guidelines that appeared to be a broader step to help manage losses at the bank.

From profit to loss

Wachovia's loss for the quarter works out to 20 cents a share. That compared with profit of $2.3 billion, or $1.20 a share, a year earlier.

Excluding merger-related and restructuring charges, the bank lost $270 million, or 14 cents a share.

Revenue fell 4.5 percent to $7.89 billion.

Analysts surveyed by Thomson Financial had expected Wachovia to earn 40 cents per share on revenue of $7.98 billion. The earnings estimates typically exclude one-time items.

Wachovia said it took write-downs of $2 billion during the quarter related to the credit crunch. It set aside $2.8 billion to cover problem loans, up from $1.5 billion in the fourth quarter.

To shore up its balance sheet, Wachovia plans to cut its dividend by 41 percent to 37.5 cents per share from 64 cents per share. It said the move is expected to save $2 billion annually "to build capital ratios and provide more operational flexibility."

The bank also said it plans to cut more jobs in its corporate and investment bank, an area that has been hit by a drop in issuance of complex securities. Since October, Wachovia has cut more than 260 jobs in corporate and investment banking, which had about 6,100 employees as of Dec. 31.

Its share sale will include 145.8 million shares of common stock at $24 each, raising about $3.5 billion. Wachovia also expects net proceeds from a convertible preferred stock offering of about $3.4 billion. The bank said it intends to use the money it raises for general corporate purposes.

Lower profit forecast

Brian Foran of Goldman Sachs said Wachovia will gain $11 billion in cash over the next two years, enough to cover losses from the company's loans.

Foran lowered his profit estimates for the next three years, and trimmed his price target to $32 per share from $33.

Thompson said that the fresh capital will be enough to cover the bank's needs and more through 2009 even if Wachovia's worst-case scenario for the housing market proves true.

"We think we are now one of the best-capitalized major banks in the country, and we think that will help us get through the credit cycle over the next couple of years," Thompson said.

Shares in Wachovia fell $2.26 to close at $25.55.