The nation's fourth-largest bank, which lost $1.3 billion in the third quarter tied to market turmoil, reported a $1.1 billion drop in the value of its asset-backed debt just in October alone.
The Charlotte, N.C.-based company said in a filing with the Securities and Exchange Commission that it's anticipating loan losses of $500 million to $600 million in the fourth quarter, citing anticipated loan growth and the impact of continuing credit deterioration in its loan portfolio.
"The expected credit deterioration will likely be focused in certain geographic areas that have recently experienced dramatic declines in housing values," the company's filing says.
At last check, shares of Wachovia dropped 1% on trading volume of more than 17 million shares.
Due to the October market deterioration, Wachovia's asset-backed collateralized debt obligations, or CDOs, experienced further declines in value in October 2007 by an amount it currently estimates to be approximately $1.1 billion pre-tax, the filing said.
In the third quarter, market losses totaling $1.3 billion pre-tax included $347 million of subprime-related valuation losses on CDOs.
As of Oct. 31, Wachovia said it had remaining exposure of $676 million to asset-backed CDOs, compared with $1.8 billion the previous month. Wachovia has exposure to subprime residential mortgage-backed securities of $2.1 billion, according to the filing.
Write-downs related to CDOs and subprime mortgage-backed securities totaled $1.11 a share during October, Wachovia said. Net write-downs for the third quarter were 35 cents a share.
The market for these assets "have remained extraordinarily volatile in the first week of November with additional rating agencies' downgrades ... and credit spread widening and illiquidity."
More write-downs coming out of Wall Street have heightened fears the fallout from the subprime turmoil is spreading deeper into credit markets. American International Group Inc. (AIG:
American International Group, Inc earlier this week joined the chorus of firms disclosing subprime-related losses.
"While it is unclear if these write-downs are enough, the remaining CDO exposure of $676 million is well below that of others," wrote analysts at Deutsche Bank in a research note on the Wachovia filing. They estimated that Morgan Stanley has $6 billion in CDO exposure, Merrill Lynch & Co. has $42 billion.
The analysts said the extra loan-loss provisions of between $500 million and $600 million are related to Wachovia's acquisition of mortgage company Golden West Financial. "As such, we believe the company is trying to get ahead of likely higher future mortgage losses in California," they wrote. Last year, Wachovia bought Golden West for $26 billion.
"Nevertheless, we consider this to be negative news," Deutsche Bank said. "Per the investment bank, management indicated that it would stay the course but we wonder if additional changes could be needed. Second, per Golden West, it now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle."
"Perhaps more important than the valuation write-downs is the need to build the loan loss reserves for credit quality deterioration," wrote Stifel Nicolaus & Co. analysts in a report Friday. "The need for additional valuation write-downs was becoming evident in recent weeks, so the Street knew it was coming. But the credit losses may not have been as expected."
The analysts lowered their fourth-quarter profit estimate for Wachovia to 55 cents a share from $1.10.
"Everyone keeps hoping that the worst is over, but we expect to see continued negative news as the fallout from the subprime lending spree spreads," said Walter O'Haire, senior analyst at financial research and consulting firm Celent.
"The hangover is not only painful, but there is no near end in sight," he said. "To complicate matters, there is still disagreement on how to best arrive at a 'market value' for various complex debt derivatives [and] securities, since almost no one wants to own the paper and there is little to no market for it today."