Analyst Merideth Whitney, who has gained some infamy lately with here bearish (and accurate) calls about the fallout from the housing debacle, called Wachovia’s prospects ‘bleak’ and downgraded the company to underperform due to the continued deterioration of the housing and mortgage markets. As the company shrinks its balance sheets the potential for revenue is negatively impacted.
This is really a no-brainer. The company realized revenues from deferred interest which will never materialize, have a ton of option ARM timebombs on the books and are in general likely to take greater loan losses in the future, and now to respond they have to unload some debt off their balance sheet to free up capital cannabalizing future revenues in favor of liquidity. Tough cycle.
From Bloomberg:
Oppenheimer & Co.’s Meredith Whitney, the analyst who correctly predicted Citigroup Inc. would reduce its dividend this year, said the earnings outlook for Wachovia Corp. has “dramatically diminished” and bank stocks will keep falling until asset prices “get real.”
Wachovia fell as much as 13 percent in New York trading after Whitney said prospects for shareholders of the Charlotte, North Carolina-based bank are “bleak.” Mortgage assets are still priced too high on U.S. banks’ balance sheets, she said.
“Historically, financials have not shrunk well,” the New York-based analyst said in an interview with Bloomberg Television. She said Wachovia last week released charge-off figures that didn’t correspond with portfolio values, meaning the bank might be shrinking its balance sheet. “Your revenues go down dramatically. Effectively, you’d be eroding capital.”
The world’s biggest financial services companies have posted more than $416 billion of losses and writedowns tied to the mortgage-market collapse, according to Bloomberg data. Wachovia’s losses totaled $13.7 billion.
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