Wachovia Shares Slip on Profit Drop

Wachovia on Friday posted a 10 percent decline in quarterly profit, missing forecasts, as the fourth-largest U.S. bank suffered $1.3 billion of write-downs at its investment banking unit.

A Wachovia branch bank is shown in a Charlotte, N.C. file photo from July 20, 2006. After a rough year, the banking industry appears headed for another in 2007. (AP Photo/Chuck Burton, File)
Chuck Burton
A Wachovia branch bank is shown in a Charlotte, N.C. file photo from July 20, 2006. After a rough year, the banking industry appears headed for another in 2007. (AP Photo/Chuck Burton, File)

Wachovia shares slid 97 cents, or 2.01 percent, at $47.17 in Friday trade on the New York Stock Exchange.

Third-quarter net income fell to $1.69 billion, or 89 cents per share, from $1.88 billion, or $1.17, a year earlier. The decline was the first in six years.

Excluding merger costs, profit was $1.71 billion, or 90 cents per share, as revenue rose 4 percent to $7.35 billion.

On that basis, analysts on average expected profit of $1.04 per share on revenue of $7.77 billion, according to Reuters Estimates.

Wachovia slashed its forecast for 2007 fee income, and nearly quadrupled the amount it set aside for bad loans.

"In such a large meltdown in global capital markets, it's tough to avoid problems," said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who rates Wachovia "sector perform."

"Wachovia dramatically increased loan-loss provisions," Cassidy added. "It took larger write-downs in commercial mortgages and structured products than rivals because it has a bigger presence. We anticipate greater credit losses in the next year, which will restrain earnings growth."

The results conclude a dismal week for large U.S. banks, which have been battered by increases in bad loans, and capital market disruptions that resulted in trading losses and left several stuck holding debt whose value was falling.

Profit fell 57 percent at Citigroupand 32 percent at Bank of America, while it rose just 2 percent at JPMorgan Chaseand 4 percent at Wells Fargo. The results and outlook for all but JPMorgan disappointed investors.

Big Write-Down

Wachovia said the $1.3 billion write-down including $1.03 billion for structured products, more than half of which related to mortgages, and $272 million for leveraged loans.

This helped push investment banking profit 80 percent lower to $105 million, as revenue sank 51 percent to $819 million.

The capital management unit, meanwhile, wrote down $40 million for asset-backed commercial paper investments.

Disruption in fixed-income markets "clearly had a disappointing impact on the results of market-oriented businesses," Chief Executive Ken Thompson said in a statement.

Wachovia said it set aside $408 million for credit losses, up from $108 million a year earlier. Net charge-offs rose 78 percent to $206 million from $116 million, reflecting increases from auto, consumer real estate and commercial lending.

Bad Loans & Wachovia's $7 Billion Elephant

Bad Loans Rise

In consumer and business banking, Wachovia's largest unit, profit rose 33 percent to $1.44 billion. Growing loan and deposit volumes and the addition of 255,000 net new retail checking accounts offset higher loan losses.

The quarter is the last where year-over-year results will be bolstered by the former Golden West Financial, an Oakland, California mortgage specialist that Wachovia bought last October for $24.2 billion. Wachovia was criticized for overpaying at the peak of the housing boom.

Earnings rose 19 percent in capital management to $275 million, and dipped 9 percent in wealth management to $72 million.

Earlier this month, Wachovia completed its acquisition of St. Louis-based A.G. Edwards for roughly $6.4 billion, creating the second-largest U.S. retail brokerage.

Lending income rose 28 percent to $4.58 billion. Net interest margin fell to 2.92 percent from 3.03 percent a year earlier, and an adjusted 2.94 percent in the second quarter.

Fee income fell 20 percent to $2.76 billion. Wachovia now expects 2007 fee income to fall at a mid-single-digit pace, excluding A.G. Edwards. In July, it forecast a low double-digit gain.

Wachovia ended September with $729 billion of assets.

Through Thursday, its shares had fallen 15 percent this year, compared with a 12 percent drop in the Philadelphia KBW Bank Index.

Sidebar: A $7 Billion Elephant?

Wachovia has about $7 billion of exposure to funds known as structured investment vehicles, the company's chief financial officer said on Friday.

SIVs are funds that buy bonds linked to mortgages and other debt and finance their purchases by selling short-term debt known as commercial paper.

SIVs have had trouble funding themselves recently and could be forced to sell billions of dollars of debt into the market to pay back their investors.

Wachovia, Bank of America, Citigroup and JPMorgan Chase are putting together a fund to bail out structured investment vehicles.

Tom Wurtz, Wachovia CFO, said in a Wednesday conference call that about $3 billion of the bank's exposure appears as foreign loans in its financial statements.