Wachovia Loses $350 Million in First Quarter

Wachovia, the fourth biggest bank in the US, announced a loss in the first quarter 2008 of $350 million, or 20 cents a share. Analysts had expected a profit of $700 million, or 40 cents a share. The stock dropped, job losses were announced, the dividend has been halved, and the bank is going to raise $7 billion to fix things.

Colin Barr of CNNMoney.com noted, “The latest quarter includes a $2.8 billion provision for possible credit losses, up from $1.5 billion in the fourth quarter and $177 million a year ago. Charge-offs, reflecting current credit losses, were $765 million. The big credit loss provision reflects deterioration in the residential mortgage market, Wachovia said. The bank said in a filing that it expects charge-offs and additional reserves of $3.2 billion to $3.8 billion for 2008 and $2.4 billion to $2.8 billion for 2009.”

The good news is that the bank sees charge-offs in 2009 decreasing from the levels of this year. Charge-offs will continue but the tide has crested. CEO Ken Thompson thinks so, anyway, “I’m deeply disappointed with our first quarter results, but I am confident we’re taking prudent and appropriate actions in this challenging period to restore Wachovia to a more profitable path. The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses. As a result, we have substantially increased our reserves.”

Wachovia will sell $7 billion worth of common and preferreds to cover much of this. The plan is to issue “Non-Cumulative Perpetual Convertible Class A preferred stock, Series L, with a liquidation preference of $1,000 per share, for an aggregate of $7 billion.” The bank said, “The convertible preferred stock will be convertible into shares of Wachovia Corporation's common stock, plus cash in lieu of fractional shares. The non-cumulative dividend rate, conversion rate and other terms will be determined by negotiations between Wachovia Corporation and the underwriters of the convertible preferred stock offering.” Wachovia Securities is the global coordinator and joint bookrunning manager, while Goldman, Sachs & Co. is serving as joint bookrunning manager of these offerings.

What is going to be interesting is just how well this sale of stock goes. With Goldman on board, there is no doubt that Wachovia will get the money it seeks, but if the offering is over-subscribed by a lot, it would be a sign that Wall Street thinks the worst is over. And if it isn’t oversubscribed, this down turn will run a while.

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