Wachovia Corp. investors were hit with a double-whammy on Monday, after the fourth largest U.S. bank reported an unexpected loss for the quarter, cut their dividends, and announced a plan to sell diluted stock.
Chief executive Ken Thompson characterized the 41 percent dividend cut as the most painful decision but said doing so would be a long-term benefit as the company strengthens its balance sheet following losses linked to the floundering housing market and tight credit markets.
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, said Thompson.
The bank said it lost $393 million in its latest quarter, or 20 cents per share, down from a $2.3 billion in the same quarter a year ago. Total revenue was down 4.5 percent to $7.9 billion.
Analysts were expecting much different results, anticipating 47 cents per share in profit with revenue at $8.37 billion, according to Reuters.
The dividend withholding would preserve $2 billion in capital annually for the bank, Wachovia said. Meanwhile, the decision to raise $7 billion in additional capital would price half those shares at a 14 percent discount, diluting the value for current shares. Investors had already experienced dilution earlier in the year when the bank raised $3.5 billion cash.
These actions are not without cost, and I wish they were not necessary, but they are, Chief Executive Ken Thompson noted on a conference call this morning.
The twin capital bolstering moves triggered a harsh reaction on Wall Street as investors sold off their stakes in the bank. Shares fell $2.26, or 8 percent to close at $25.55.
Wachovia has suffered after an enthusiastic buy of a leading savings and loan bank two years ago.
Wachovia's $25 billion purchase of the California-based Golden West had been called a transformative step by Thompson at the height of the most recent real estate boom. The purchase helped Wachovia expand from its east coast and southern strongholds into west coast's fast-rising housing market.
However the severe downturn in that sector now has Wachovia anticipating future losses. The firm said that it would set apart $2.83 billion for covering credit losses and insuring against future failed loans.