Wachovia, the fourth-largest U.S. bank, on Tuesday posted an $8.86 billion second-quarter loss, slashed its dividend and announced 6,350 job cuts after losses tied to mortgages soared.
Wachovia shares fell as much as 11.6 percent, but recovered after Chief Executive Robert Steel said he does not plan to issue common stock to raise capital and has many ways to boost capital without selling assets at bargain prices.
Wachovia has nevertheless been among the major lenders hardest hit by the nation's housing crisis, following a disastrous $24.2 billion purchase in October 2006 of Golden West Financial, a California mortgage specialist.
The bank set plans Tuesday to raise or preserve more than $5 billion of capital by the end of 2009.
"Credit deterioration was worse than expected," said Gerard Cassidy, an analyst at RBC Capital Markets, who has a "sector perform" rating on the bank.
"Wachovia is in capital-preserving mode, which means it has to shrink its balance sheet, leading to a vice-like effect on income statement. Revenue growth will likely shrink, even as operating expenses rise. This will lead to lower earnings, or possibly losses, in the future," he added.
The second-quarter net loss for Charlotte, North Carolina- based Wachovia equaled $4.20 per share and compared with a profit of $2.34 billion, or $1.22, a year earlier.
Excluding items, the loss was $2.67 billion, or $1.27 per share. Analysts expected a loss of $1.30 per share, Reuters Estimates said. Wachovia had on July 9 projected a $2.6 billion to $2.8 billion loss excluding items.
Results included a $6.06 billion write-down of goodwill because asset values declined and reflected a $4.19 billion increase in reserves for bad loans.
They also included a $975 million charge related to the tax treatment of leveraged leases, $936 million of losses from disrupted capital markets, a $590 million charge for other legal matters and $391 million of losses on securities sales.
On a conference call, Steel said results were "clearly a disappointing performance." He pledged that Wachovia would be "realistic and balanced and cautious," as well as "prudently paranoid," in working through the credit environment.
Speaking later to journalists, Steel and Chairman Lanty Smith said they planned to keep Wachovia independent.
Dividend, Job Cuts
Wachovia slashed its quarterly dividend to 5 cents per share from 37.5 cents, saving about $700 million of capital per quarter. It has lowered the dividend 92 percent this year.
The bank said it plans to cut 6,350 jobs, affecting more than 5 percent of its roughly 120,000 employees. Wachovia said it will also eliminate 4,400 open positions and contractors.
Wachovia said it has already cut 2,000 retail mortgage jobs and plans to eliminate 4,400 more in the next year.
It also said it plans to sell at least $20 billion of loans and securities by year's end, reduce expenses by $490 million this year and $1.5 billion in 2009, and slow expansion in California and branch openings.
Moody's Investors Service, Standard & Poor's and Fitch Ratings lowered the bank's long-term credit ratings. Moody's and Fitch's rating outlooks are "negative." S&P's is "stable."
Wachovia hired Steel from the U.S. Treasury Department, where he was undersecretary for domestic finance, to replace Ken Thompson, whom it ousted a month earlier.
Steel was a key figure in the Bush administration's response to the nation's mortgage and credit crisis, and was involved in JPMorgan Chase's bailout in the spring of investment bank Bear Stearns.
Wachovia said it ended the quarter with a Tier 1 capital ratio, which measures its ability to cover losses, of 8 percent. Regulators consider 6 percent sufficient. Wachovia raised $8.05 billion of capital in April.
In afternoon trading, Wachovia shares were up 86 cents, or 6.5 percent, at $14.04 on the New York Stock Exchange. The cost of protecting Wachovia debt against default fell, according to Phoenix Partners Group.
"Pick-A-Pay" Mortgage Writedown
Wachovia's increase in loan loss reserves included $3.3 billion related to the $122 billion portfolio of "Pick-a-Pay" adjustable-rate mortgages in which Golden West specialized and which enticed Wachovia to buy Golden West in the first place.
The bank has since stopped making Pick-a-Pay loans, which let borrowers pay less than the interest due and are sometimes called option adjustable-rate mortgages. On Monday, it said it will stop offering home loans through brokers.
Wachovia said its total allowance for credit losses was $10.96 billion, up from $6.77 billion at the end of March and $3.55 billion a year earlier. Net charge-offs increased more than eight-fold from a year earlier to $1.31 billion.
Profit at the corporate and investment banking unit fell 73 percent to $209 million, hurt by write-downs tied to subprime, commercial and consumer mortgages, and to non-subprime debt.
In consumer and business banking, Wachovia's largest unit, profit fell 23 percent to $1.12 billion, hurt by rising credit costs, mainly for mortgages.
Capital management profit fell 5 percent to $297 million, hurt by the liquidation of an Evergreen Investments fund, while wealth management profit rose 9 percent to $98 million.
Through Monday, Wachovia shares had fallen 65 percent this year, while the KBW Bank Index was down 30 percent.