Wachovia's (WB) new CEO threw everything including the kitchen sink into a massive Q2 writeoff. This is predictable and is presumably intended to clean the books for upside going forward. Whether the upside actually materializes, however, is still a question.
Wachovia (WB) reported a larger than expected net loss of $8.9 billion ($1.27 per share on a non-GAAP basis vs. consensus of $0.78), and inside the range of earnings it preannounced on July 10th ($1.22 and $1.33).
Revenue came in at $7.5 billion, below consensus of $8.37 billion and towards the lower end of the consensus range of between $7.41 and $9.07 billion. On a GAAP basis, Wachovia's loss was a whopping $4.20 per share.
Most of the loss is attributable to a $6.1 billion goodwill impairment Wachovia was forced to take as a result of:
"declining market valuations and the resulting effect on commercial, corporate lending and investment banking subsegments. The goodwill impairment charge has no impact on Wachovia's tangible capital levels or regulatory capital ratios, because goodwill is deducted when computing."
Wachovia will reduce its dividend by 87% to 5 cents, which it expects will preserve $700 million in capital per quarter.
Key Figures:
- Ended quarter with $50 billion in regulatory capital and a Tier 1 ratio of a low 8%.
- $936 million in market disruption-related losses.
- $590 million in legal reserves.
We will be covering the conference call at 10:00 AM Eastern live. Wachovia's non-GAAP earnings fell year-over-year from $1.23, and quarter-over-quarter from $(1.23). It looks as though incoming CEO Robert Steel is trying to purge as much of the sketchy assets he can from WB's balance sheet, reset expectations, lower the bar, and try to deliver upside going forward.
In this vein, Wachovia has announced that it is exiting wholesale mortgage origination (a step in the right direction). Given the huge impairment charge, we expect analysts to focus on how much exposure WB has left on risky assets, how much management expects values of the remaining exposure to decrease, and WB's outlook for the economy and credit environment. BofA President Ken Lewis was (as usual) very optimistic yesterday, so it will be interesting to see how different WB's view is.
