Wachovia, the fourth-largest U.S. bank, said its quarterly profit fell a larger-than-expected 98 percent, hurt by a surge in bad loans and credit losses amid mortgage and capital markets turmoil.
The results represent a setback for Wachovia, which spent much of the last year in acquisition mode, buying California mortgage specialist Golden West Financial Corp for $24.2 billion in 2006 before the housing market turned sour. The buying spree continued with the October purchase of independent brokerage A.G. Edwards for $6.4 billion.
Shares fell as much 7.6 percent on the opening bell to a six-year low, on a day in which the broader stock markets seized with fear over a possible recession, although Wachovia shares took back that decline later in the session.
Fourth-quarter net income fell to $51 million, or 3 cents per share, from $2.3 billion, or $1.20, a year earlier. Excluding merger costs, profit was $160 million, or 8 cents per share, the bank said.
On that basis, analysts on average expected profit of 32 cents per share, according to Reuters Estimates.
Results reflected $1.7 billion of losses related to structured products including collateralized debt obligations.
This included losses of $1 billion tied to subprime mortgages, $600 million for commercial mortgages, and $123 million for other consumer mortgages.
The Charlotte, North Carolina-based bank also set aside $1.5 billion for credit losses, up sevenfold from $206 million a year earlier, and more than triple the third quarter's $408 million.
"It suggests they were light in their estimates of bad credit earlier, and are playing catch-up," said Michael Mullaney, who helps invest $10 billion at Fiduciary Trust in Boston, which owns the bank's shares. "I hope it doesn't portend even greater losses down the road."
Net charge-offs totaled $461 million, up from $140 million a year earlier and $206 million in the third quarter.
Nonperforming assets soared 74 percent in the October-December period, to $5.1 billion from $2.93 billion.
"Continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth-quarter results substantially," Chief Executive Ken Thompson said in a statement.
Golden West Not So Golden
Some of the losses were attributable to the former Golden West Financial, a California mortgage specialist that Wachovia bought in October 2006 for $24.2 billion, an amount critics called too high.
Profit in consumer and business banking, Wachovia's largest unit, fell 18 percent to $1.24 billion. Corporate and investment banking posted a $596 million loss, compared with a year-earlier $670 million profit.
Profit rose 42 percent in capital management to $350 million, and rose 1 percent in wealth management to $85 million.
In October, 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 1 percent to $4.67 billion, though net interest margin fell to 2.88 percent from 3.09 percent a year earlier, and from 2.92 percent in the third quarter. Fee income and other income fell 37 percent to $2.53 billion. Wachovia ended the year with $763.5 billion of assets.
Wachovia shares sank $2.27, or 7.4 percent, to $28.53 in morning trading on the New York Stock Exchange, and touched a six-year low.
Through Friday, Wachovia shares had fallen 45 percent in the last year, compared with a 34 percent drop in the 24-member Philadelphia KBW Bank Index.