Wachovia Earnings Down; Stock Up 27 Percent In Two Days

Wachovia, now with A.G. Edwards under its wing, unloaded a whopper of bad news yesterday, reporting a second quarter loss of $8.9 billion, or $4.20 per share; that’s nearly three times more than some analysts expected.

Wachovia, now with A.G. Edwards under its wing, unloaded a whopper of bad news yesterday, reporting a second quarter loss of $8.9 billion, or $4.20 per share; that’s nearly three times more than some analysts expected.

While Wachovia Corp. was busy posting bad numbers, its two retail financial advisory units—one for high-net-worth financial planning and the other for retail brokerage, including A.G. Edwards—did relatively well.

Yet some analysts—and the stock market—seem to think the firm may be beginning a turnaround.

In the past two days (Monday and Tuesday), Wachovia shares jumped by 27 percent. That may strike some investors as a little optimistic. But Ladenburg Thalmann analyst Dick Bove thinks Wachovia is on the right path despite a dismal earnings outlook for the next couple of years. Bove reckons Wachovia’s full-year loss for 2008 will be $3.90 per share, a far cry from his pre-earnings prediction of a profit of $0.69 per share.

“The fact is that the bank’s business away from its troubled mortgage involvements is quite good,” Bove says. “Loans are up. Deposits are up. Adjusted margins are up. Non-interest income businesses were stable and the bank has announced a major cost cutting campaign.”

The quarter’s loss was primarily due to two factors: the addition of $4.2 billion to its accounting reserve—bank language for “write down”—and it took a $6.1 billion impairment chare as a result of the closure of businesses associated with mortgage originator Golden West. The firm said it is cutting the quarterly stock dividend to $.05 per share, for a quarterly savings of $700 million; it is also exiting the whole sale mortgage origination business.

Robert Steel, Wachovia’s CEO going on two-weeks, and the former Under Secretary of the Treasury, said, “In the short term, the entire organization is focused on protecting, preserving and generating capital; reinforcing Wachovia’s strong liquidity position; and reducing risk.” Steel also stressed that the firm’s core franchise, footprint and set of businesses are still “exceptionally attractive.”

Bove mentions rumors that Goldman Sachs might be eying Wachovia as a purchase for that attractiveness. In particular is its $448 billion in deposits and the retail distribution capability of its 14,600 financial advisors. Goldman has a much smaller, higher-end wealth management unit and might like to expand, says Bove. Both firms deny any interest in one another, he writes in the report.

The Wealth Management unit includes private banking, trust department and financial planning; the Capital Management unit includes retail brokerage services and asset management. The earnings announcement noted the unit enjoyed:

  • 9 percent earnings growth to $98 million on 6 percent revenue growth in what it called “challenging” markets.
  • 11 percent growth in net interest income on 10 percent loan growth and improved deposit spreads.
  • 16 percent growth in fiduciary and asset management fees as a pricing initiative implemented in the third quarter of 2007 and other growth offset declines in equity valuations. Insurance commissions declined largely due to a soft market for insurance premiums and nonstrategic insurance account dispositions.
  • A 4 percent increase in non-interest expense driven by continued investment in private banking and Western expansion.

But, the firm says, the wealth management unit suffered a 3 percent decline in assets under management to $77.3 billion—“largely due to market depreciation,” the company says.

As for A.G. Edwards and Wachovia Securities (company calls it its Capital Management unit, and it includes asset management): Total revenues were $2.3 billion in the second quarter, up 28 percent from $1.8 billion in the second quarter of last year. Earnings were $297 million, down from $312 million in the second quarter of last year. Its mutual fund family, Evergreen, suffered an $89 million loss in the liquidation of a fund. And as was the case at Merrill Lynch and Citigroup, which reported earnings last week, the unit suffered a 10 percent drop in assets under management driven by net outflows of client assets—$17.6 billion to be exact.

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