Fears of bleak second-quarter earnings at banking companies were confirmed Thursday, and then some.
Wachovia Corp., long considered a bellwether for the industry with a squeaky clean reputation for managing credit risk, warned of lower second-quarter and yearend profits as credit quality continues to deteriorate and rising interest rates choke off revenues from market-related businesses.
The company said it would add $200 million to its allowance for loan losses for the second quarter to account for an expected 30% increase in nonperforming loans. In addition, Wachovia said, revenues from capital markets, mortgage, and brokerage businesses are not expected to meet previously set growth targets.
The announcement sent shares of Wachovia into a tailspin that sucked down shares of most other financial services companies. (See story, back page.) Shares of the Winston-Salem, N.C., banking company closed Thursday down $13.125, or 18.7%, at $57.0625.
Many analysts said that as Wachovia goes, so goes the market. "What happens to Wachovia first happens to the industry later," said Marni Pont O'Doherty, an analyst at Keefe, Bruyette & Woods.
Analysts said earnings per share for the second quarter are expected to be closer to $1.32, 2 cents lower than the consensus estimate. They also estimated that earnings per share growth for the year would be in the range of 6% to 8%, lower than the previous target range of 10% to 12%.
Wachovia, like other regional banking companies, has had torrid loan growth over the last year, especially commercial loan growth, and some analysts suggested that the competition for loan customers may have lead Wachovia and other companies to loosen underwriting standards.
The additional provision was tied to a $70 million increase in nonperforming loans over first quarter levels. Don Truslow, Wachovia's treasurer and comptroller, said $50 million of that was tied to one credit, but he declined to be more specific.
Company executives acknowledged that successive interest rate increases over the last year have put added pressure on commercial loan customers to make payments.
"As growth in the economy has diminished, pressure on customer performance has increased," said Robert S. McCoy Jr., chief financial officer of the $69 billion-asset company. "We have experienced a rise in nonperforming loans."
Wachovia has also maintained a far lower reserve-to-loans ratio than the typical banking company, 1.17% compared to the industry average of 1.42%. The additional reserves bring its ratio up to 1.50%.
Wachovia also said fee income growth would fall $30 million short of projections for the quarter, including a $20 million shortfall in capital markets fees, and $5 million declines each in mortgage banking and retail brokerage. Fee income makes up about 40% of the company's total revenues.
Analysts said Wachovia's disclosure would probably be just the first of many. "It's an industry issue," said Michael Mayo, an analyst at Credit Suisse First Boston. "It's simply a matter of timing."
"There are a number of examples of companies where we expect to see estimates come down," said Catherine Murray, an analyst at J.P. Morgan & Co., who listed First Union Corp., Bank One Corp., and U.S. Bancorp as examples.
Some analysts said they had a grim view of the company Thursday, putting it in the category of some other regional banks that have been forced to lower expectations because of sluggish revenue growth. Those others include Minneapolis-based U.S. Bancorp.
"We expect management to announce some strategic actions tied to efforts to get the company more focused in order to get the company positioned to sustain stronger and more consistent growth," said Henry C. Dickson, an analyst at Citigroup's Salomon Smith Barney, in a research note. Wachovia "is now in a position of having to reestablish momentum."