Wachovia Net Drops 10% on Mortgage, Loan Writedowns

Oct. 19 -- Wachovia Corp. reported its first earnings decline in six years and missed analysts' estimates after a record $1.3 billion of writedowns for bad loans and mortgage-backed securities.

Net income fell 10 percent to $1.69 billion, or 89 cents a share, the Charlotte, North Carolina-based company said today in a statement. The shares dropped 1.8 percent after earnings excluding merger costs were 14 cents below the $1.04 average estimate of analysts surveyed by Bloomberg.

Profit at the five biggest U.S. banks totaled $18.7 billion for the quarter, the lowest in almost four years, as demand for securities linked to mortgages and leveraged loans dried up. Chief Executive Officer Kennedy Thompson called the results ``disappointing,'' and said the $6.5 billion acquisition of the A.G. Edwards Inc. brokerage firm this year would help the bank rebound.

``The headlines for the banks are going to continue to get worse,'' said Daniel Bandi, chief investment officer at Integrity Asset Management LLC in Independence, Ohio, which owns about 80,000 shares of the bank. ``Wachovia has a great franchise, a great management team and it is trading at a discount, so over the next year or two, we think this stock will show some pretty good returns.''

Wachovia, down 17 percent this year, fell 84 cents to $47.30 in composite trading on the New York Stock Exchange at 11:06 a.m.

Return on Equity

Wachovia, the fourth-largest U.S. bank, said third-quarter revenue rose 4.3 percent to $7.35 billion, and return on equity, a gauge of how effectively the company reinvests profits, was 9.6 percent, down from 14.85 percent a year earlier. Net income fell from $1.88 billion in the third quarter of 2006, or $1.17 a share.

The provision for credit losses rose to $408 million from $108 million. By comparison, Bank of America Corp., also based in Charlotte, set aside $2 billion in the quarter to cover bad loans amid the worst U.S. housing slump in 16 years.

Earnings at Wachovia's corporate and investment bank fell to $105 million from $533 million a year earlier. The bank wrote down $488 million of structured products tied to commercial mortgages, $103 million linked to consumer mortgages and $438 million in collateralized debt and loan obligations. The writedown for leveraged buyout loans totaled $272 million.

Citigroup, JPMorgan

Home foreclosures have forced banks to write down the value of mortgages and home equity loans. Citigroup, Bank of America and JPMorgan together wrote down more than $2.5 billion in loans for leveraged buyouts of companies.

Thompson has shifted Wachovia's focus on consumer banking to the western half of the country to spur growth. The bank plans to open 21 offices in California this year, ending the year with about 160 in the state.

The 56-year-old CEO has overseen about $30 billion of acquisitions in the past two years, including mortgage lender Golden West Financial Corp. and A.G. Edwards, sparking investor concern that he overpaid at the peak of the housing and stock markets. Wachovia shares have declined about 20 percent since the Golden West purchase was announced in May 2006, trailing Citigroup Inc., Bank of America and JPMorgan Chase & Co., the three biggest U.S. banks.

The $24.6 billion acquisition of Golden West added $125 billion of assets and 285 branches in 10 states. Wachovia has quadrupled its profit since the end of 2001 in part by taking over companies such as Birmingham, Alabama-based SouthTrust Corp. Since the start of 2006, Wachovia spent more on takeovers than Citigroup's $24 billion, Bank of America's $24 billion and JPMorgan's $3.3 billion, data compiled by Bloomberg show.

Golden West

Wachovia's general bank unit reported a 33 percent increase in operating profit, aided by the Golden West purchase. It made up 76 percent of the bank's operating earnings in the quarter, up from 56 percent a year earlier.

Wachovia more than doubled its provision for loans losses from the second quarter to guard against rising defaults for consumer loans. The company had net charge-offs of $206 million, or 0.19 percent of total loans, up from 0.14 percent in the second quarter.

Total commercial loans gained 19 percent in the quarter, while consumer borrowings almost doubled. Fees and other income declined 20 percent to $2.76 billion.

Profit at Wachovia's brokerage unit, which added Prudential Securities in 2003 and AG Edwards this year, gained 19 percent. AG Edwards's pretax profit margin before the merger was 16 percent, compared with 26 percent at Wachovia Securities, Thompson said in September.

Non-interest expenses increased to $4.37 billion from $4.05 billion. The net interest margin -- the difference between what it pays to hold deposits and earns from loan interest -- narrowed to 2.92 percent from 3.03 percent a year earlier.