Investors question financial sector rebound

Posted by: ap 4 weeks, 1 day ago

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CHARLOTTE, N.C. (AP) _ A surprisingly large second-quarter loss at Wachovia Corp. has quickly revived Wall Street's concerns that the financial sector still has a long way to go before it recovers from the year-old credit crisis.

Investors got a cold wake-up call when Wachovia, the nation's fourth-largest bank, racked up an $8.86 billion loss because of charges and reserves for bad mortgage loans. The Charlotte-based bank on Tuesday also cut its dividend for the second time this year and eliminated 10,750 positions.

After markets closed, Washington Mutual Inc. delivered a further jolt. It swung to a $3.33 billion loss in the second quarter as it boosted its loan loss reserve to more than $8 billion, betting on more soured mortgages.

Several regional banks also posted losses Tuesday or said their second quarter profit fell.

Yet, Wachovia shares rose 27 percent after its new CEO said he doesn't plan to raise new capital through a stock offering, but does plan to cut $2 billion of expenses by the end of next year and sell parts of the fourth-biggest U.S. bank.

A sharp drop in the price of oil and bargain-hunting in battered financial companies contributed to a broad rally that helped the shares, even with the bad news.

"Wachovia's news isn't isolated. I think there is still a structural issue with U.S. banks," said Russell Walker, a risk management professor at the Kellogg School of Management at Northwestern University. "Many of the banks, including Wachovia, are still facing challenges."

The banks' results were especially sobering for investors who last week sent stocks soaring after better-than-estimated reports from Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.

Even Wachovia's crosstown rival, Bank of America Corp., managed to beat Wall Street expectations. The nation's second-largest bank by assets said Monday its second-quarter earnings fell 41 percent, hurt from the impact of the ensuing credit crisis.

Global banks and brokerages have written down some $300 billion of mortgage-backed securities and other risky investments since the crisis began last year. Questions remain who will have to raise additional capital going forward, and just how much will be needed.

In the meantime, many are making sharp cutbacks to their mortgage operations. On Monday, Wachovia said it will stop offering home loans through brokers.

Big banks, such as Bank of America Corp. and National City Corp., have already stopped making loans through brokers entirely, relying instead on their loan officers. During the second quarter, WaMu also announced plans to exit the wholesale lending business and close all remaining standalone home loan centers.

"Wachovia, along with several other banks, is returning to much more traditional lending practices," said Walter O'Haire, senior analyst at Celent, a Boston-based financial research and consulting firm. "Lend to your existing customers and stay within your own geographic footprint."

Regional bank KeyCorp on Tuesday posted a second-quarter loss of $1.13 billion as it set-asides to cover bad loans swelled. Atlanta-based SunTrust Banks Inc. also posted worse results in the second quarter than the year-ago period as it ramped up loan-loss provisions.

Profit at Regions Financial Corp. fell 55 percent. The Birmingham, Ala.-based bank set aside $309 million for loan losses, compared with $60 million during the year-ago period.

Wachovia's own problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

The bank has made several changes to its loan portfolio since, including tightening underwriting standards and stopping making certain loans.

"The path to resolving a crisis starts with acceptance. Wachovia has now accepted that it is in trouble," said Celent senior analyst Bart Narter. "The bank is making changes in its business to contain these losses."