The Wall Street Journal-20080123-Wachovia- National City Join Bank-Earnings Slide
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Wachovia, National City Join Bank-Earnings Slide
The glum news from U.S. banks continued with steep declines in fourth-quarter profit at five large lenders, led by Bank of America Corp. and Wachovia Corp., while mortgage-related woes plunged regional bank National City Corp. to a steep loss.
The results capped a miserable earnings season for the banking industry, which was riding high until the mortgage meltdown triggered huge write-downs on investments, forced banks to begin hastily rebuilding loan-loss reserves, and exposed how far many lenders strayed from their roots during the housing boom. "It is back to basics," Bank of America Chief Financial Officer Joe Price told analysts in a conference call yesterday.
While bankers sounded chastened by their mistakes, yesterday's earnings reports underscored to investors that a turnaround is nowhere in sight. National City, which earlier this month slashed its common- stock dividend by 49% after barreling into subprime mortgages and the Florida real-estate market, said it is unlikely to restore the dividend to previous levels in the next 12 to 18 months.
Despite saving $500 million a year with the dividend cut, Jeff Kelly, National City's chief financial officer, said the Cleveland bank still is considering "a number of options for nondilutive . . . capital issuance this quarter."
At Bank of America and Wachovia, net income in the latest quarter was the lowest in nearly a decade. Bank of America, based in Charlotte, N.C., and the largest U.S. bank by stock-market capitalization, said its profit plummeted 95% from a year earlier. Rival Wachovia's fourth-quarter net income fell 98%.
At Regions Financial Corp., Birmingham, Ala., which has a major presence in Florida and other parts of the Southeast being clobbered by the housing downturn, profit tumbled 80%. KeyCorp, of Cleveland, reported an 83% profit decline. Fifth Third Bancorp of Cincinnati saw its fourth-quarter net income slide 39%. National City swung to a loss of $333 million, or 53 cents a share, from a year-earlier profit of $842 million, or $1.36 a share.
While all six banks said the performance of many businesses remains at least decent overall despite the weakening economy, deteriorating credit quality is causing loan-loss reserves to balloon in anticipation of further trouble. The six banks reported a combined loan-loss provision of $6.22 billion in the fourth quarter, up 181% from $2.21 billion a year earlier.
"Our performance, even under these conditions, has not been what it should have been," Bank of America Chief Executive Kenneth Lewis said.
The fourth quarter included a write-down of $5.28 billion on the bank's collateralized debt obligations, larger than Bank of America projected in November. Bank of America also had a write-down of about $400 million related to buying troubled securities from its asset- management arm. Such bruises are a big reason why Mr. Lewis is eviscerating certain trading activities, sharply curtailing structured products such as asset-back securities and shutting down CDOs.
Wachovia's fourth-quarter results included signs of growing strain from the $24 billion acquisition of Golden West Financial Corp. in 2005. The California thrift grew to be one of the biggest issuers of adjustable-rate mortgages. As of Dec. 31, nonperforming assets in Wachovia's option-ARM stood at $2.77 billion, Wachovia said, more than triple the $675 million a year earlier.
Wachovia Chief Executive Ken Thompson said he doesn't expect the company to take a charge related to Golden West's worsening results. Mr. Thompson also said that Wachovia's current dividend isn't threatened by rising loan-loss provisions. Wachovia also wrote down by $600 million the value of its portfolio of securities backed by commercial mortgages, a type of investment that some experts fear is a looming trouble spot.
To bolster its financial strength, Bank of America announced plans to raise more than the $2 billion in capital that it previously said it would issue as part of the pending $4 billion takeover of mortgage lender Countrywide Financial Corp. At year end, Bank of America's Tier 1 capital ratio was 6.87%, down from 8.64% a year earlier -- and below its internal target of 8%.
In an interview, Mr. Price said Bank of America executives hope to rebuild capital to their target level "sooner rather than later."
National City's net loss was an especially vivid reminder of how much some banks now regret their decisions to bet aggressively on the housing bubble. "We allowed the mortgage business to become too large relative to the rest of our company," said Peter E. Raskind, its chairman and CEO.
