Wachovia, Capital One in trouble..

Nov 10, 2007

Wachovia, Capital One, E*Trade warn on credit

NEW YORK - THE US credit crisis deepened on Friday as Wachovia Corp reported a potential US$1.7 billion (S$2.5 billion) loss on mortgage-related debt, while credit card company Capital One Financial Corp said more customers are missing payments.
The news helped cause losses in broader market indexes, on expectations that mounting write-downs and bad loans may plunge the economy into recession. Shares of financial companies rebounded, but after weeks of heavy selling on worries about the impact of the credit downturn on their bottom lines.

Bank of America Corp and JPMorgan Chase & Co, the second- and third-largest US banks, said the poor market conditions could hurt fourth-quarter results.

After markets closed, online brokerage E*Trade Financial Corp withdrew its forecast for 2007 profit of 75 US cents to 90 US cents per share, citing expected write-downs in its fixed-income holdings. Its shares fell more than 11 per cent.

'This is now worse than Long-Term Capital (Management),' said Jack Malvey, chief global fixed-income strategist at Lehman Brothers Inc, referring to the hedge fund whose 1998 collapse threatened to unhinge global financial markets. 'This is a painful lesson in financial engineering.' Charlotte, North Carolina-based Wachovia also expects to boost loan losses by US$500 million to US$600 million this quarter, largely because of 'dramatic declines' in housing values.

Wachovia joined Citigroup Inc, Merrill Lynch & Co, Morgan Stanley and other financial companies to report tens of billions of dollars of subprime losses.

'We are not immune'
Wachovia Chief Risk Officer Don Truslow said at a banking conference in Boston that credit problems in housing were concentrated in 'several pockets' in California and Florida.

'The housing market certainly has been deteriorating very, very quickly in certain parts of the country,' he said. 'We are not immune.' Wachovia paid US$24.2 billion in October 2006 for Golden West Financial Corp, a California adjustable-rate mortgage lender.

'It now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle,' Deutsche Bank Securities analyst Mike Mayo wrote.

Gary Townsend, a Friedman, Billings, Ramsey & Co analyst, downgraded Wachovia to 'underperform' from 'market perform.' 'Subprime is a huge issue, and it's going to get worse,' said Ted Parrish, who helps invest US$1.3 billion at Henssler Asset Management in Kennesaw, Georgia. 'My uncertainty is over how long it will take lenders to recover from write-offs.'

Credit analysts at Citigroup estimated US$64 billion of industry losses from asset-backed CDOs. Britain's Barclays Plc on Friday rejected rumours it might lose US$10 billion.

Separately, Wachovia said it would reduce reported third-quarter profit by US$72 million, or 4 US cents per share, to reflect its share of Visa Inc's US$2.1 billion antitrust settlement with American Express Co on Wednesday.

Capital One card losses
Capital One, the largest independent MasterCard and Visa credit card issuer, said its net charge-off rate rose to 3.28 per cent in October from the third quarter's 2.86 per cent.

The charge-off rate in US cards rose to 5.11 per cent from 4.13 per cent in the same periods, while card loans at least 30 days past due rose to 4.75 per cent from 4.46 per cent. Capital One had on Tuesday raised its forecast for 2008 credit losses.

'While management previously indicated that the US card loss rate would trend north of 5 per cent in the fourth quarter, we were surprised to see how fast this jumped,' Credit Suisse analyst Moshe Orenbuch wrote.

Standard & Poor's revised its rating outlook for McLean, Virginia-based Capital One to 'stable' from 'positive.' Bank of America, also based in Charlotte, said market dislocations, including those affecting CDOs, will 'adversely impact' fourth-quarter results.

New York-based JPMorgan, meanwhile, said it may need further write-downs this quarter, given its exposure to about US$50 billion of leveraged loans, subprime mortgages and CDOs.

Lehman's Malvey said: 'We will find out over the next three to six quarters if we are coming close to recession or may cross over the recession line.' On Friday, Wachovia shares rose 35 US cents to US$40.65; Capital One rose US$1.36 to US$54.26; and Bank of America rose 48 US cents to US$43.98. JPMorgan fell 30 US cents to US$42.31. The respective stocks are down 29 per cent, 29 per cent, 18 per cent and 12 per cent this year.

E*Trade, after closing 1 US cent lower at US$8.59, fell to US$7.60 after-hours. At the close, it was down 62 per cent this year. -- REUTERS