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Oppenheimer's Whitney Cuts Wachovia, Gives Bleak Outlook

Last update: 7/15/2008 8:14:49 AM

     DOW JONES NEWSWIRES   

Oppenheimer & Co.'s Meredith Whitney cut her investment rating on Wachovia Corp. (WB) shares as she projected the bank's mortgage portfolio will fall by 9% sequentially and its total on-balance sheet loans will decline by "at least" 5% by year end.

Separately, Whitney issued a bleak outlook, as she expects bank stocks to keep heading lower until asset valuations "get real."

In a note to investors Tuesday, Whitney cut her rating on Wachovia underperform from perform, citing Oppenheimer's "dramatically diminished earnings outlook for the company."

Shares of Wachovia slid 14% in recent pre-market trading to $8.50. Regional bank National City Corp. (NCC), which took the rare step Monday of issuing a statement that it was "experiencing no unusual depositor or creditor activity," fell another 7% pre-market to $3.50. It's down 77% this year and 21% this month.

Whitney outlined capital as a chief concern, saying Oppenheimer believes Wachovia may have reduced its portfolio by $50 billion in the second quarter. Oppenheimer is expecting Wachovia to report a second-quarter loan-loss allowance of about $9.5 billion.

Whitney called Wachovia's problem the "denominator effect," with losses growing while assets decline, resulting in higher loss ratios, lower assets and lower net interest income.

"In this very real scenario, expenses simply cannot come down fast enough, seriously jeopardizing WB's ability to grow earnings," Whitney said, adding, "We fear that WB simply cannot cut costs fast enough to mitigate capital erosion."

Wachovia has already said it expects to report a second-quarter loss next week of $1.23 to $1.33 a share.

Oppenheimer lowered its estimate for a 2008 loss to $1.35 a share, and projects a 2009 loss of 35 cents a share. That compares with mean estimates of analysts polled by Thomson Reuters for earnings of $1.04 a share for 2008 and $2.37 a share for 2009.

In the broader outlook on banks released by Oppenheimer, Whitney said banks will need to "swiftly address true asset values and adjust their books accordingly" before financial markets will be able to stabilize.

She wrote that banks' carrying valuations on mortgage-related assets are "still too high," with banks like Wachovia using assumptions from the Office of Federal Housing Enterprise Oversight rather than Case-Shiller. Whitney noted that Freddie Mac (FRE) and Fannie Mae (FNM) no longer use OFHEO as a guidepost "as it has been proven far more unreliable than any other estimate."

The weak outlook for Wachovia comes as new Chief Executive Robert K. Steel is trying to immediately start cleaning up the mess he inherited at the U.S. bank. But investors are worried about how long it could take and what will be left.

U.S. banking stocks were hammered Monday amid concerns triggered by the government seizure of IndyMac Bancorp Inc. (IMB) and fears holdings of securities issued by Fannie Mae and Freddie Mac will have to be written down, hurting earnings. Wachovia shares fell below $10 and are now down 37% in July alone.

-By Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@dowjones.com

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(END) Dow Jones Newswires

July 15, 2008 08:14 ET (12:14 GMT)