As more banks report write-downs tied to the global credit crunch, analysts say Wachovia Corp may have losses lurking in an area that has garnered less investor attention.

The fourth-largest U.S. bank has in recent years aggressively tried to add market share by underwriting commercial mortgage-backed securities.

Demand for such securities has slid amid credit concerns, leaving dealers struggling to unload loans whose quality might be perceived as less sound than investors now demand.

Analysts have estimated Wachovia's net CMBS exposure at about $9 billion. They say the Charlotte, North Carolina-based bank could face a related fourth-quarter write-down as large as $1.5 billion.

CMBS-related write-downs may wipe out earnings in the quarter, wrote Howard Mason, an analyst at Sanford C. Bernstein & Co, on December 6. He projects a $1.5 billion write-down for the securities, on top of $488 million in the third quarter.

Meanwhile, Credit Suisse analysts led by Todd Hagerman wrote on December 20 that CMBS losses at Wachovia might reach $1 billion to $1.2 billion.

Marks will increase further given the severe dislocations in the fixed income capital markets during the quarter, including materially wider CMBS credit spreads, the analysts wrote.

Wachovia spokeswoman Christy Phillips-Brown declined to comment. The bank is scheduled to report year-end results on January 22. Mason rates Wachovia outperform, while Hagerman rates it underperform.


In the third quarter, Wachovia suffered $1.3 billion of write-downs from credit market turmoil, causing overall profit to decline 10 percent. Analysts had expected profit to rise.

Then on November 9, the bank said fourth-quarter results would likely also be hurt by its residential mortgage exposure.

It reported a potential $1.1 billion pre-tax loss tied to lower quality subprime mortgages, and said it might boost loan losses by $600 million largely because of falling home prices.

Analysts on average expect the bank to post a quarterly profit of 36 cents per share, excluding items, according to Reuters Estimates.

I've been in the industry for 32 years, and I've been CEO for seven years, and this is as tough an environment as I've seen, Wachovia Chief Executive Ken Thompson said at a December 12 Goldman Sachs & Co financial services conference.

Wachovia boosted by 60 percent the amount of loans it placed in CMBS from January to September to $22.94 billion from $14.36 billion a year earlier, according to Commercial Mortgage Alert.

Rival bankers said Wachovia moved aggressively in 2007 to add market share by offering clients favorable financing terms, but has had difficulty finding buyers for the debt.

As an example, Wachovia struggled in October to find buyers for CMBS related to Lightstone Group's purchase of the Extended Stay Hotels group from Blackstone Group LP (BX.N: Quote, Profile, Research), which Wachovia helped finance, people familiar with the situation said.

Lightstone, a private real estate firm not known for its hotel investments, funded the $8 billion transaction with $7 billion of debt. By October, six months after the purchase was announced, Wachovia had found investors for only a modest, high-yielding piece of the debt, the people said.


Mason, the Bernstein analyst, said if Wachovia writes down $1.5 billion of CMBS, its tier-1 capital level could fall to about 6.75 percent at year end. That's below the tier-1 level of struggling Citigroup Inc (C.N: Quote, Profile, Research), and close to the 6 percent that regulators say signifies a well-capitalized bank.

The key risk in our view is that sustained write-downs in 2008 on Wachovia's CMBS-related exposure creates a strain on Wachovia's regulatory capital levels, Mason wrote.

Regulators consider the capital level a measure of ensuring that banks have sufficient funds to cover losses.

Still, Mason said Wachovia's stock should be near a bottom, as investors look forward to 2008 earnings. The shares have lost about a third of their value this year, while the 24-member Philadelphia KBW Bank Index .BKX, which includes Wachovia, has lost about one-fourth of its value.