By David Mildenberg
July 23 (Bloomberg) -- Wachovia Corp. Chief Executive Officer Robert Steel, in the job only two weeks, drove up the bank's market value $7.7 billion in a single day after reporting the biggest quarterly loss in its history.
Wachovia rallied 27 percent in New York trading yesterday, the most in almost 25 years, after Steel said he will cut jobs, reduce the dividend and consider the sale of ``non-core'' assets. The former Treasury undersecretary told shareholders the bank had an $8.9 billion second-quarter loss, and he still faces the legacy of the previous CEO's $24 billion bet on home loans that could undermine earnings for years to come.
``Before they were in denial; they've started to come to grips,'' said Bart Narter, a senior analyst at Celent, the Boston-based financial research and consulting firm. Steel ``is anticipating future losses. The problem is, you don't know what future losses are going to be,'' Narter said.
Former CEO Kennedy Thompson bought Golden West Financial Corp. in 2006, at the height of the housing boom. Concern about bad loans helped drive Wachovia to a 17-year low last week, and now Steel, 56, must decide what to do about $122 billion of remaining Golden West mortgages. Two-thirds are in California and Florida -- two states hit hardest by the U.S. housing slump.
The Charlotte, North Carolina-based bank said yesterday that home prices will probably tumble another 14 percent in California and 19 percent in Florida. The lender didn't include the Golden West purchase in the $6.1 billion writedown announced yesterday.
Wachovia was little changed at $16.79 in early New York trading today, giving the company a market value of about $36 billion, according to Bloomberg data.
Core Value
Steel urged investors to look away from Golden West and focus on the $4 billion in quarterly profit produced elsewhere in the company.
``It's become even more clear to me that Wachovia is very strong and has excellent opportunities going forward,'' said Steel, who joined the bank on July 9. Wachovia's gains yesterday lifted the stock price to the highest since June 26. The shares are still down 56 percent this year.
The bank resembles a golfer who pars the first 16 holes, then scores a 12 on the last two, said Deutsche Bank AG analyst Mike Mayo, who upgraded his opinion on big U.S. banks yesterday.
Wachovia set aside $4 billion in reserves for future losses and showed it can earn $16 billion on an annualized basis, excluding its mortgage problem, Mayo wrote in a report.
`A Bit Evasive'
Steel deferred questions on what he considers to be ``non- core assets,'' saying on a conference call with analysts, ``I admit to being a bit evasive.'' He said he'd be prepared to answer in several months.
Wachovia hasn't tried to raise capital by selling shares to boost its 8 percent Tier 1 ratio, Steel said, relying instead on savings from dividend cuts and cost reductions. When Wachovia last raised money, in April, shares sold at $24 -- about 43 percent more than where the stock closed yesterday.
Wachovia's operating earnings should enable the company to ``absorb up to $16 billion in annual provisions without having to raise additional capital via a stock offering,'' Merrill Lynch & Co. analyst Edward Najarian wrote in a report yesterday. He rates Wachovia at ``neutral.''
Steel pointed to Wachovia Securities as a particularly strong business that complements the bank's retail banking division. The investment banking unit, which earned $209 million after two straight quarterly losses, received limited mention from the new CEO.
Option-ARMs
Wachovia isn't getting interest payments on almost 6 percent of its $122 billion in option adjustable-rate mortgages, which let borrowers skip payments and add interest to their principal balances. Again, most of the loans were in California and Florida.
So far the company has charged off $454 million of the loans as uncollectible. That number is expected to soar to $6.6 billion by the end of 2009, the bank said yesterday, citing a more negative outlook on both economic and housing markets than it had previously disclosed.
``This possibly is a turning point,'' said John Moore, a Charlotte insurance agency owner who owns 200,000 Wachovia shares. ``The market is also telling you that after more than 20 years of leadership by Ed Crutchfield and Ken Thompson, the shareholders are worse off,'' he said.
Crutchfield was CEO of predecessor First Union Corp. from 1984 until 2000, when Thompson took over.
To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina, at dmildenberg@bloomberg.net.
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