Thursday, December 13, 2007

Wachovia To Grow Earnings

Wachovia (WB) CEO Ken Thompson said something on Wednesday no other bank has stepped up to say yet.

At a Goldman Sachs conference in New York he said is confident that the bank's dividend is safe and he is "comfortable" that his bank will "grow earnings" in 2008, but gave no specific forecast.

On the same day in a regulatory filing, the bank said securities backed by loans dropped in value in the past two months at a rate equal to the decline in the July-September period. At that time Wachovia took a $1.34 billion hit. In October they said the value had fallen by $1.1 billion and they now project a $240 million writedown for November to cover the difference. The assets being classes being written down include commercial mortgage, leveraged finance, consumer mortgage and structured credit products, including subprime residential mortgage backed securities ("RMBS") and collateralized debt obligations having RMBS as collateral.

The bank also doubled the amount it expects to set aside to cover bad loans in the fourth quarter to $1 billion.

Here is where we can understand the sentiment of the market. The Fed's action today injected liquidity into the markets and will lower LIBOR, reducing the non-performing loans in all these writedowns, Wachovia came out and said they will grow earning next year and the dividend is safe. Good news, right? No. The only thing the market is focused on is the write-downs. This is witnessed by Merrill Lynch downgrading Wachovia shares Wednesday morning to "Sell" from "Neutral." The stock is trading down almost 3%.

Wachovia now trades at 9 times current earnings that will grow next year and yields 5.8%.

Thompson must be real confident considering the current bank CEO situation out there to say the things he said. If either the dividend gets cut OR earning do not grow, Thompson will most likely find his head on the chopping block. Operating under the assumption he is not actively seeking that event, one must conclude both events are "in the bag' so to speak. That is not to say the the dividend will be increased or that earnings grow by more than a penny, it is to say that a major deterioration from here is doubtful.

Berkshire's (BRK.A) Warren Buffett said yesterday that he expected "major divergences" in financials results during the next year. With earnings declines expected across the sector, the fact that Wachovia will grow them, it should be one of the winners in the category.

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