CHARLOTTE, N.C.–Wachovia Corp. is getting a lesson in “timing is everything."
The nation's fourth-largest bank reported a $393 million (dollar figures U.S.) first quarter loss and has been forced to cut its dividend and seek a $7 billion cash injection to make up for a poorly timed expansion of its mortgage business.
The company also 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 on a conference call. "I know these actions aren't without cost. I wish they weren't necessary, but they are."
Shares in Wachovia fell $2.26, or 8.1 per cent, to $25.55 on Monday.
It's the second time this year the Charlotte-based bank has gone to the well for cash, a move analysts say more banks large and small will do to brace themselves against further loan losses.
"This isn't surprising and we'll see more of it," said Donn Vickrey, an analyst with Gradient Analytics Inc. in Scottsdale, Ariz.
As the housing market worsens and the credit crisis deepens into mortgages beyond subprime consumers to include even prime borrowers and commercial real estate, Vickrey said others like struggling Midwestern bank National City Corp. and regional bank holding company Chemical Financial Corp. are at risk for an earnings miss due to the rate of growth in nonperforming loans and charge-offs.
Even larger outfits, like Citigroup Inc., the No. 1 U.S. bank by assets, may have to have to raise more cash by selling additional stakes in themselves to outside investors or by slashing their dividends.
Last week, Seattle-based Washington Mutual Inc. said that a consortium of investors led by TPG would invest $7 billion into the struggling thrift.
"There's a number of banks out there that are really high-risk for this same thing," Vickrey said.
Wachovia's troubles with the housing slump have been compounded by its 2006 acquisition of California-based Golden West Financial Corp., 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.
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 per cent to $7.89 billion from $8.27 billion last year.
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 also said it took write-downs of $2 billion during the quarter related to the credit crunch. It also 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 per cent to 37.5 cents per share from 64 cents per share. It said the move is expected to save $2 billion annually in order "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 involve 145.8 million shares of common stock at $24 each, raising roughly $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.
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. He 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.
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