The Wall Street Journal-20080115-Credit Crunch- Sovereign Bancorp Warns of Charges
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Credit Crunch: Sovereign Bancorp Warns of Charges
Sovereign Bancorp Inc., citing volatility in the financial markets and deterioration in the credit markets, warned that its fourth- quarter results will be hurt by about $1.61 billion in pretax charges.
The Philadelphia bank also announced it shut down its automobile lending originations in the Southeast and Southwest, the latest example of problems with car loans.
Sovereign, the parent company of Sovereign Bank, said its fourth- quarter results will be affected by about $1.4 billion in pretax goodwill impairments -- about $600 million relates to the consumer segment and about $800 million from its New York Metro segment.
A combination of a weakening consumer-credit market, lower valuations for banking companies and Sovereign's decision to stop originating auto loans in the Southeast and Southwest resulted in the goodwill impairment for the consumer segment.
Sales of assets such as auto lending units generate immediate cash at a time when banks are likely to face persistent difficulties borrowing money, and they allow banks to replenish their capital levels without resorting to more-draconian steps such as slashing dividend payments to shareholders.
United Kingdom banking giant HSBC Holdings PLC may be trying to sell all or parts of its $13 billion auto-finance business, The Wall Street Journal reported earlier this month. And Citigroup Inc. may be thinking about selling its North American auto lending unit as it considers getting rid of noncritical assets. The unit issued about $9 billion in loans last year in the U.S. and Canada.
The New York metro impairment is related to the June 2006 acquisition of Independence Community Bancorp. Earnings for that business have been hurt by the current operating environment, as revenue and deposit growth have been less than expected, Sovereign said.
Sovereign will also record a $180 million pretax charge related to the impairment of certain Fannie Mae and Freddie Mac preferred securities in Sovereign's available-for-sale investment portfolio. The company said the charge is warranted because it can't predict whether the market value of the securities will recover in the near term from recent significant value impairment.
In addition, the bank boosted its overall provision for credit losses to $738 million from $650 million in the third quarter, while the actual loan-loss provision is slated to fall to about $148 million from the third quarter's $162.5 million. That reflects the fourth- quarter reserve exceeding net charge-offs by $88 million.
Sovereign will also record $27 million in pretax charges related to financings Sovereign provided to two mortgage companies that have defaulted on certain agreements.
"Sovereign is a fundamentally sound financial institution," Chief Executive Joseph P. Campanelli said. "Importantly, our capital exceeds the levels defined as 'well capitalized' by our regulators. Our forecasts indicate that Sovereign can maintain this designation even under a further worsening of industry conditions."
Mr. Campanelli said in the fourth quarter the company saw modest net-interest-margin expansion and solid fee income in its commercial and consumer businesses. "While we are cognizant of the challenging current environment, Sovereign is prepared to take advantage of attractive opportunities that might arise."
The bank is scheduled to release its fourth-quarter report Jan. 23.
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David Enrich and Carrick Mollenkamp contributed to this article.
