Wachovia Misses on Investment Banking Losses

Oct.19.07 | About: Wells Fargo (WFC)

Number-four U.S. bank Wachovia said Friday Q3 profits fell 10.1% due to trading losses caused by disruption in capital markets, and a quadrupling of its loan-loss provisions. Net profit was $1.69 billion ($0.89/share), down from $1.88 billion ($1.17/share) a year earlier. Net of merger expenses, Wachovia's profit per share was $0.90, well short of analyst forecasts of $1.03/share. Revenue rose 4.3% to $7.35 billion, short of the $8.02 billion analysts expected. As has been the case with other banks, loan-loss provisions surged to $408 million from $108 million. General banking operations income was up 33%, and its capital-markets unit posted a 19% earnings gain; both units are benefitting from recent acquisitions of Golden West Financial and A.G. Edwards respectively. Meanwhile corporate and investment banking earnings dropped 80%, hit by a $591 million loss in consumer and commercial mortgage-structured products, $438 million on structured credit products, and $272 million on LBO loans. Return on equity fell to 9.6% from 14.8%. "Disruption in the fixed income markets in the third quarter... had a disappointing impact on the results of market-oriented businesses," CEO Ken Thompson said. "While the impact of the market disruption was significant, it’s worth noting that the majority of the lower market valuations in the third quarter largely arose from a repricing of risk in the marketplace, and do not reflect deterioration in the underlying credit quality of the assets in our leveraged finance and commercial real estate securitization businesses," he said (full earnings call transcript later today), echoing closely the thoughts of Thornburg CEO Larry Gladstone Wednesday (full story). Shares are down 2.3% in pre-market trading.

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