Wachovia Corp posted on Friday a 10 percent decline in third-quarter profit, missing forecasts, as the fourth-largest U.S. bank suffered $1.3 billion of write-downs at its investment banking unit.
The drop was the first in six years. It concluded a dismal week for large U.S. banks, which have been battered by increases in bad loans and capital market disruptions that resulted in losses on mortgages and other kinds of debt.
Profit fell 57 percent at Citigroup Inc and 32 percent at Bank of America Corp. It rose 2 percent at JPMorgan Chase & Co and 4 percent at Wells Fargo & Co. Results and outlook for all but JPMorgan disappointed investors.
Net income for Charlotte, North Carolina-based Wachovia fell to $1.69 billion, or 89 cents per share, from $1.88 billion, or $1.17, a year earlier.
Excluding merger costs, profit was $1.71 billion, or 90 cents per share, as revenue rose 4 percent to $7.35 billion.
On that basis, analysts on average expected profit of $1.04 per share on revenue of $7.77 billion, Reuters Estimates said.
Wachovia slashed its forecast for 2007 fee income, and said loan losses will continue to be elevated as the housing downturn persists well into, or through all of, 2008.
I'm deeply disappointed that our overall results for the quarter are not better, Chief Executive Ken Thompson said on a conference call. It's clear that we are in an environment of building reserves (for bad loans).
In late Friday morning trading, Wachovia shares were down 99 cents, or 2.1 percent, to $47.15 on the New York Stock Exchange.
Wachovia set aside $408 million for bad loans, up from $108 million a year earlier, and net charge-offs rose 78 percent to $206 million from $116 million.
Nonperforming assets rose $881 million since June to $2.99 billion, almost entirely related to real estate. This included the former Golden West Financial Corp., a California mortgage lender that Wachovia bought last October for $24.2 billion. It was faulted for overpaying at the peak of the housing boom.
The $1.3 billion write-down included $1.03 billion for structured products and $272 million for leveraged loans. About $300 million concerned debt related to subprime mortgages, which deteriorated despite carrying a triple-A rating.
It is amazing that we could take $300 million of losses on triple-A paper, Thompson said. We didn't expect that that paper could degenerate that fast, with that kind of swiftness.
The write-down helped push investment banking profit 80 percent lower, to $105 million, as revenue sank 51 percent to $819 million.
Thompson said commercial real estate securitization revenue may face negative pressure for several quarters.
Wachovia's capital management unit wrote down $40 million for asset-backed commercial paper investments.
In such a large meltdown in global capital markets, it's tough to avoid problems, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who rates Wachovia sector perform.
It took larger write-downs in commercial mortgages and structured products than rivals because it has a bigger presence, Cassidy added. We anticipate greater credit losses in the next year, which will restrain earnings growth.
FEE OUTLOOK CUT
In consumer and business banking, Wachovia's largest unit, profit rose 33 percent to $1.44 billion. Growing loan and deposit volumes and the addition of 255,000 net new retail checking accounts offset higher loan losses.
Profit rose 19 percent in capital management to $275 million, and fell 9 percent in wealth management to $72 million. Earlier this month, Wachovia completed its acquisition of St. Louis-based A.G. Edwards Inc for roughly $6.4 billion, creating the second-largest U.S. retail brokerage.
Lending income rose 28 percent to $4.58 billion. Net interest margin fell to 2.92 percent from 3.03 percent a year earlier, and an adjusted 2.94 percent in the second quarter.
Fee income fell 20 percent to $2.76 billion. Wachovia now expects 2007 fee income to fall at a mid-single-digit pace, excluding A.G. Edwards. In July, it forecast a low double-digit gain.
The bank ended September with $729 billion of assets.