Wachovia's Loss a Grim Sign for Banks
Apr 14 02:59 PM US/EasternBy MADLEN READAP Business Writer
NEW YORK (AP) - The shocking first-quarter loss at Wachovia Corp., a company long viewed as a relatively conservative player during the mortgage boom, suggests that 2008 will be at best a rebuilding year even for the nation's better-positioned banks.
Results this week from large banks such as JPMorgan Chase & Co., Citigroup Inc., Washington Mutual Inc. and Wells Fargo & Co. should shed more light on how much fixing-up the industry has to do. So far, it's not looking pretty—and that means fewer loans for consumers, skimpier dividends for shareholders and more job cuts.
Wachovia's $393 million quarterly loss was accompanied by a 41 percent dividend cut, plans to eliminate 500 jobs in its corporate and investment bank, and a move to sell $7 billion worth of stock. Many banks have already tried to raise cash through stake sales—Wachovia itself raised $8.3 billion earlier this year, Citi has raised about $20 billion, and WaMu has raised $5 billion, just to name a few.
But investors are not convinced banks have enough cash to survive what is expected to be a tough year for consumer credit. Wachovia's loss—brought on by a $2 billion asset write-down and provisions of $2.8 billion for anticipated credit losses—was viewed as a harbinger for the industry, and sent bank shares tumbling on Monday.
"What you're seeing is a taste of things to come," said Len Blum, managing director at Westwood Capital LLC and former managing director of Prudential Securities Inc.'s investment banking group.
Already, analysts were forecasting first-quarter losses at Washington Mutual and Citigroup, which report Tuesday and Friday, respectively. JPMorgan and Wells Fargo are expected to post profits on Wednesday, but much smaller ones than they notched at this time last year.
Citi, for one, is expected to write down its portfolio by anywhere between $10 billion and $20 billion. All told, the global financial industry has written down assets by some $190 billion over the past few quarters. Last week, the International Monetary Fund estimated that in a couple years, write-downs will total nearly $1 trillion.
"I think it's going to get a lot worse before it gets better," Blum said. "I don't think any bank is immune from this."
The reasons, he said, are that the housing market is nowhere near a rebound and consumers are extremely burdened with debt, having taken on $6.9 trillion in debt between 2000 and 2006 to more than double what they owed previously.
It's not just subprime mortgages causing problems for banks.
In Wachovia's report, it said defaults are increasing for option adjustable-rate mortgages—where the rates change monthly and consumers can defer payments—and Alt-A mortgages, which are given to people with better credit than subprime borrowers, but who are not prime.
Anticipated losses in option ARMs—which essentially operate like a mortgage with a home-equity loan embedded in it—do not bode well for home equity loans, said Keefe Bruyette & Woods bank analyst Fred Cannon.
WaMu, Wells Fargo and Bank of America Corp. have particularly large exposure to home-equity loans. JPMorgan has already warned it expects to write off $450 million in home-equity loans in the first quarter.
"While subprime was kept to a fairly small share of assets, exposure to home equity is much more significant," Cannon said. "Home equity loans for a lot of consumers became a savings account."
So with banks paring back lines of home equity credit, it's inevitable that defaults are going to rise in an expanding swath of debt, from auto loans to credit cards to personal loans.
And as defaults rise, banks will need to sock away more cash to prepare for future losses. Wachovia's big provision suggests that banks are realizing they can no longer rely on historical models for reserving.
"When there's a radical shift, the models are out the window," said SNL Financial banking analyst John McCune. As more banks alter their loan-loss modeling, he said, "I think it's going to show that they haven't been provisioning aggressively. ... They're surely under- reserved for all this."