Credit Suisse cuts estimates on Wachovia (WB) after that mind-boggling $9 billion write-off. It also says the worsening credit crisis and WB's mortgage-ladened balance sheet will keep buyers on the sidelines.
First, the good news: CS is cautiously optimistic about incoming CEO Robert Steele's turnaround plan, characterizing the plan as "progress":
Announced strategic initiatives to rationalize the balance sheet and preserve capital. Mgmt announced an 87% cut in the dividend to $0.05/sh which is est. to save about $700mm in capital quarterly.
In addition, mgmt is targeting expense reduction strategies of $1.5B by YE '09, and reductions in loans/securities of about $20B by YE '08. Addt'l actions include the exit of the wholesale mortgage orig. channel and repositioning the CD book. A review of potential non-core asset sales is in the very early stages.
But Credit Suisse remains cautious of the "rapidly deteriorating credit environment," as well as Wachovia's still fragile balance sheet. Additionally, CS predicts that WB's continuing problems with mortgage-related assets will keep prospective buyers away:
...the balance sheet repair will undoubtedly be a challenging and time consuming process-one that continues to keep potential buyers at bay for some time to come, in our view... While mgmt made a prudent decision to lower the dividend and preserve capital levels against the backdrop of a rapidly deteriorating credit environment, we remain cautious at this stage of the credit cycle. The open environment remains challenging and credit quality will continue to erode over the foreseeable future, pressuring both earnings and capital. While the planned balance sheet strategies are a step in the right direction, investor confidence remains low and the risks remain high, in our view.
Credit Suisse reiterates its Neutral rating and $14 price target.
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