Wachovia (WB)

Wachovia's poor loan underwriting standards are making the company chew through capital and requiring huge loss provisions to be taken each quarter. The company will soon erode its existing Tier One (equity) capital, and they will have to issue more equity if the stock rallies. This means that management will be actively working against existing shareholders by adding supply, essentially offsetting any appreciation that might occur.

From http://collegeanalysts.com/2008/07/18/banks-that-are-not-wells-fargo-wfc-or-us-bancorp-usb-guilty-until-proven-innocent/

Wachovia (WB) joins the list of financials that promise one thing and deliver another as it reports a quarterly loss and tries to raise more cash, $7Billion worth, with a further offering. The 4th largest bank in America gave Wall Street a loss of $0.20/share vs. an expected $0.40/share profit.

Revenue was also weak at $7.89Billion vs. $7.98 expected. The numbers do in fact speak for themselves and when you've got the CEO coming out and saying that he's very disappointed in the results it's not a good sign for another financial name. But wait! Wasn't this the same CEO that months prior promised that things would be better, promised that the dividend is safe, promised a turnaround? In fact it is! But good things aren't meant to last and Wachovia's $0.64/share dividend (a yield of almost 9% at current valuations) wasn't meant to last either.

With losses, come jobs cuts and dividend slashes. Much like its bigger sibling in the banking world, Citigroup (C), Wachovia was forced, by this credit and mortgage mess, to cut its dividend by about 40% to $0.375/share. While still a respectable 5% yield, bringing it in-line with banking peers, the move comes as a blow to shareholders hoping for a turnaround in the near turn. Investors would hope in the best case that the high yield would correct itself based on a higher stock price, not on a dividend cut.

Bright spots for Wachovia seem to be few and far between as the company took a further $2Billion in write-downs and set aside another $2.8Billion for future loan losses. With losses, come jobs cuts and dividend slashes. Much like its bigger sibling in the banking world, Citigroup (C), Wachovia was forced, by this credit and mortgage mess, to cut its dividend by about 40% to $0.375/share. While still a respectable 5% yield, bringing it in-line with banking peers, the move comes as a blow to shareholders hoping for a turnaround in the near turn. Investors would hope in the best case that the high yield would correct itself based on a higher stock price, not on a dividend cut.

The 4th largest bank in America gave Wall Street a loss of $0.20/share vs. an expected $0.40/share profit(for Q1 08).Revenue was also weak at $7.89Billion vs. $7.98 expected. The numbers do in fact speak for themselves and when you've got the CEO coming out and saying that he's very disappointed in the results it's not a good sign for another financial name. But wait! Wasn't this the same CEO that months prior promised that things would be better, promised that the dividend is safe, promised a turnaround? In fact it is! But good things aren't meant to last and Wachovia's $0.64/share dividend (a yield of almost 9% at current valuations) wasn't meant to last either.

WB's Option-ARM portfolio comprises 45% of their loan book. Its going bad very fast. They expect 12-14% of the portfolio to be written off. 13% of 122b is roughly $15b. WB market cap as on today is $31b. They have to raise capital...sell non-core assets or raise equity or whatever....

WB earnings will be under pressure...

Organic Growth for Now : While Citi and other competitors are expanding in international markets through joint ventures and acquisitions, Wachovia has failed to follow suit.

Basic Investment Banking : Wachovia's investment banking business is not as established as its competitors: at Citigroup or Bank of America. As a result it does not fully take advantage of the the benefit of a strong M&A market. With the yield curve inverted, the firm is less shielded from this problem as it doesn't have much access to revenues that could be made in advising transactions.