Acquiring Wachovia, the troubled bank, will not be easy – or cheap – no matter what CEO Robert Steel says.
The executive told investors last week that only $10 billion of the bank’s $500 billion loan portfolio was “problematic” and that it had an advantage over rival banks because Wachovia didn’t sell its mortgage loans – and thus could deal directly with borrowers to work out any delinquencies.
But Steel, who was battling a rapidly eroding stock price at the time – it was off 43.6 percent in a week at the time – was not giving folks the clearest picture of the quagmire Wachovia is stuck in, according to Wall Street analysts and a review of the bank’s balance sheet.
Appearing on CNBC’s “Mad Money,” Steel said, “$10 billion out of $500 billion are the problematic aspects.”
Analysts tell The Post the $10 billion problem Wachovia faces are commercial construction loans – part of a $48 billion commercial loan portfolio and not the mega-billion pick-a-pay mortgage loans on the bank’s books.
At a recent conference, Steel told analysts that he’s been on the job for a few months and he still believes the total losses on the $122 billion portfolio will only be 12 percent – at current market value that’s $14.6 billion.
Jason Talbert, an analyst with the New York hedge fund, Wesley Capital, told Steel, according to Lehman research, that he believes Wachovia is facing losses closer to 20 percent – or $10 billion more then Steel.
Talbert’s not alone.
Merrill Lynch’s Guy Moszkowski wrote in a research note last week: “While most of WB’s credit weakness (relative to the nation’s other large banks) has been driven by the rapid deterioration in its option ARM loan portfolio, it is also important to note that WB’s commercial loan portfolio is deteriorating faster than those of the other major banks.”
In fact, Moszkowski points out, Wachovia’s total consumer and commercial delinquencies have grown 125 percent year-over-year compared to the 51 percent average growth for the top six banks.
Wachovia’s own filings show that 71 percent of its option ARM loan portfolio – that’s $86.6 billion – are on houses in California, Florida and Arizona, the country’s hardest hit regions.
In those areas, losses can hit 35 percent, according to estimates made by Office of Thrift Supervision officials.
That would amount to a $39.2 billion loss – roughly $24.6 billion over Steel’s estimate.
Steel also told viewers of Jim Cramer’s cable show that his “bank has a big advantage in working through its problems because it has a direct relationship with mortgage borrowers that allows the bank to work out problem loans with borrowers.”
“We have lots of flexibility to figure out how to do this,” Steel said.
But flexibility doesn’t seem to help soaring delinquency rates, as the rise in Wachovia’s delinquencies show.
One analyst also expressed concerns over the level of loan loss provisions. Oppenheimer’s Meredith Whitney said she expects Wachovia to need an extra 158 percent saved for loss provisions this year compared to last – they have currently only set aside $10 billion.
She gives them the worst “underperform” rating of the big bank group at -$5.00 per share for 2008.
The issue of Wachovia’s loan portfolio strength was brought to the fore last week when its shares shot up on word that Morgan Stanley was weighing a deal to buy the bank.
But Morgan bankers, once they kick the tires, will surely find out that a couple of the tires may be flat.