Investors question financial sector rebound
Associated Press, July 7, 2008

CHARLOTTE, N.C. -- Surprisingly large second- quarter losses at Wachovia Corp. (NYSE: WB) and Washington Mutual Inc. (NYSE: WM) have quickly revived concerns that the financial sector still has a long way to go before it recovers from the year-old credit crisis.

Investors who were growing optimistic after a string of upbeat bank results in recent days were jolted Tuesday when Wachovia, the nation's fourth- largest bank, racked up an $8.86 billion loss because of charges and reserves for bad mortgage loans. The Charlotte-based bank also cut its dividend for the second time this year and eliminated 10,750 positions.

Washington Mutual, the nation's largest savings and loan, delivered a further blow, swinging to a $3.33 billion loss as it boosted its loan loss reserve to more than $8 billion, betting it will have more soured mortgages.

Both companies warned of steep cost cuts -- Wachovia said it was eliminating 10,750, positions, including those held by 6,350 current workers. Seattle-based WaMu said it would be cutting up to $1 billion in expenses by the end of 2009.

And several regional banks also posted losses Tuesday or said their profits fell.

Wachovia's results, coming before trading began on Wall Street, initially sent financial and other stocks falling. The stock market revived as the price of oil skidded again, and so Wachovia's stock rose 27 percent -- but with WaMu's results released after the close underscoring the problems in the financial sector, selling could resume when the market opens on Wednesday

"Wachovia's news isn't isolated. I think there is still a structural issue with U.S. banks," said Russell Walker, a risk management professor at the Kellogg School of Management at Northwestern University. "Many of the banks, including Wachovia, are still facing challenges."

The banks' results were especially sobering after better-than-estimated reports from Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) had raised hopes that most of the damage from the credit crisis had occurred. Wachovia's crosstown rival, Bank of America Corp. (NYSE: BAC), also managed to beat Wall Street expectations.

But the fact remains that global banks and brokerages have written down some $300 billion of mortgage-backed securities and other risky investments since the crisis began last year, and there are fears that more write-downs are ahead as more mortgages fail. Questions remain about which companies will have to raise additional capital going forward, and just how much will be needed.

In the meantime, many are making sharp cutbacks to their mortgage operations -- which got the banks into trouble during the housing boom by making loans to too many risky customers. On Monday, Wachovia said it will stop offering home loans through brokers. Other big banks, such as Bank of America and National City Corp. (NYSE: NCC), have already stopped making loans through brokers entirely, relying instead on their loan officers.

"Wachovia, along with several other banks, is returning to much more traditional lending practices," said Walter O'Haire, senior analyst at Celent, a Boston-based financial research and consulting firm. "Lend to your existing customers and stay within your own geographic footprint."

Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

The bank has made several changes to its loan portfolio since, including tightening underwriting standards and stopping making certain loans.

"The path to resolving a crisis starts with acceptance. Wachovia has now accepted that it is in trouble," said Celent senior analyst Bart Narter. "The bank is making changes in its business to contain these losses."

Wachovia said it lost the equivalent of $4.20 per share in the April-June period. In the same timeframe last year, the bank earned $2.34 billion, or $1.22 per share.

Excluding $6.1 billion in write-downs to the value of its intangible assets and merger-related and restructuring charges of $128 million, Wachovia lost $2.67 billion, or $1.27 per share. Analysts on average expected a loss of 78 cents per share on revenue of almost $8.4 billion.

Earlier this month, the bank had projected a $2.6 billion to $2.8 billion quarterly loss, equal to $1.23 to $1.33 per share, excluding goodwill items.

Wachovia said it is setting aside $10.96 billion for credit losses, up from $6.77 billion in the first quarter and $3.55 billion a year earlier. Net charge-offs, loans it doesn't think are collectable, increased more than eight-fold from a year earlier to $1.31 billion.

WaMu reported a loss of $3.33 billion, or $6.58 per share, compared with a profit of $830 million, or 92 cents per share, in the year-ago period. Results include a previously disclosed, one-time reduction of $3.24 per share related to the company's $7.2 billion capital raise in April. Excluding the reduction, the loss per share was $3.34.

Analysts on average expected a loss of $1.05 per share. Analyst estimates typically exclude one-time, unusual charges.

WaMu's loan loss reserves increased by $3.74 billion to $8.46 billion. The company set aside a total of $5.9 billion during the quarter to cover bad loans, compared with $372 million in the same quarter of last year.

Total net charge offs rose to $2.17 billion, while nonperforming assets grew to 3.62 percent of total assets as of June 30, from 2.87 percent at the end of the first quarter.

Regional bank KeyCorp (NYSE: KEY) posted a second-quarter loss of $1.13 billion as it set-asides to cover bad loans swelled. Atlanta-based SunTrust Banks Inc. (NYSE: STI) also posted worse results in the second quarter than the year-ago period as it ramped up loan-loss provisions.

Profit at Regions Financial Corp. (NYSE: RF) fell 55 percent. The Birmingham, Ala.-based bank set aside $309 million for loan losses, compared with $60 million during the year-ago period.

Russell Walker