A huge write-down by Wachovia Corp. on Wednesday probably means Wells Fargo & Co. will avoid taking such painful hits after it acquires the struggling bank later this year.
Wachovia (WB) reported a $23.9 billion third-quarter net loss after writing down the value of the goodwill associated with some of its businesses by $18.8 billion. Goodwill measures the value of a business beyond its tangible assets. It covers things such as a company’s brand or reputation.
Wachovia’s write-down gets a lot of the bad news out of the way before Wells (WFC) acquires the company, analysts said on Wednesday.
“Wells probably wanted Wachovia to take as many charges as they can now,” Jefferson Harralson, an analyst at Keefe, Bruyette & Woods, said in an interview. “It’s better for Wells to get all the perception issues out of the way now.”
Wachovia probably wouldn’t have taken this charge if Wells wasn’t buying the bank, Gerard Cassidy, an analyst at RBC Capital Markets, wrote in a note to investors.
Roughly two-thirds of the goodwill write-down came from the retail and small business part of Wachovia’s General Bank unit. That’s where a $119 billion portfolio of option adjustable-rate mortgages sits, the troubled remnant of Wachovia’s doomed acquisition of Golden West at the peak of the housing boom in 2006.
The Golden West purchase created about $15 billion of goodwill, Paul Miller, an analyst at Friedman, Billings, Ramsey, noted.
“Our best guess is that they just wrote down all the goodwill from the Golden West deal,” he said in an interview.
Wachovia now expects cumulative losses of 22% on this portfolio, up from a previous estimate of 12%. Most of that will be driven by continued declines in home prices.
Wachovia expects nationwide home prices to fall by between 20.8% and 27.6%, peak to trough, by the middle of 2010. In California, where most of the option ARM portfolio is focused, such declines may reach 23.1% to 30.2%, the bank estimated in a presentation on Wednesday.
These mortgages are now worth 95% of the underlying homes, on average. That’s up from a loan-to-value ratio of 71% when the mortgages were originated, Wachovia said.
“That’s a big jump,” Harralson said.
With more borrowers underwater — with homes worth less than their mortgages — foreclosures may continue to climb in this portfolio, he added.
“Many of loans that went bad were because the borrower sensed that they were hopelessly underwater,” he explained. “That’s driven a lot of these losses.”
Still, Wells Fargo has already factored a lot of this into its acquisition of Wachovia, Harralson and Miller said.
When Wells announced the deal, the bank said it expected cumulative losses of 26% on Wachovia’s option ARM portfolio, Harralson noted.