Monday, 14 April 2008

Wachovia's Turn To Dilute Shareholder Wealth

Last week it was Washington Mutual (WM) this week it's Wachovia's (WB) turn to slash their dividend, dilute the crap out of existing shareholders by raising new capital and raise their loan loss provisions to parabolic proportions: From

Wachovia to raise $7 billion of capital, slash payout
Banking giant posts loss and increases loan-loss provisions

Wachovia Corp said on Monday that it would raise $7 billion of capital and slash its dividend as it posted a $350 million first-quarter net loss and a higher loan-loss provision....

....Wachovia's need for capital comes only two months after the Charlotte, N.C., bank raised $3.5 billion through a preferred-stock sale.

At the time, The Wall Street Journal reported, the company told shareholders that those funds made the company more confident that it was well positioned in 2008, and Wachovia officials denied that dividend payments would be reduced to conserve cash.

But on Monday the company said it cut its dividend to 37.5 cents a share from 64 cents, payable June 16 to holders of record May 30. The move will preserve $2 billion of capital annually.

Reflecting preferred-dividend payments, Wachovia posted a loss of $393 million, or 20 cents a share, compared with net income of $2.3 billion, or $1.20, in the year-earlier period. Revenue fell 4.5% to $7.9 billion.

"The precipitous decline in housing-market conditions and unprecedented changes in consumer behavior prompted us to update our credit-reserve modeling and rely less heavily on historical trends to forecast losses. As a result, we have substantially increased our reserves," said Ken Thompson, Wachovia's chief executive officer, in a statement.

The provision for credit losses in the 2008 first quarter was $2.83 billion, compared with $1.5 billion in the fourth quarter and $177 million in the year-earlier first period.

The chart speaks for itself, loan loss provisions are growing to astronomical proportions for a number of banks. Whilst many have been focusing on the dollar amount of writedowns, they have neglected the staggering increases in loan loss provisions.

The enormous hike in provisions is going to eat into profits for a number of banks for the rest of 2008 and into 2009. Returning to some sense of normalcy for some of these banks could be 2 - 3 years away.