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08 May 2006
MOODY'S AFFIRMS WACHOVIA RATINGS; REVIEWS GOLDEN WEST FOR UPGRADE
New York, May 08, 2006 -- Moody's Investors Service affirmed its ratings on Wachovia Corporation
(senior at Aa3) and subsidiaries. In a related action, Moody's
placed the long-term ratings of Golden West Financial Corporation
(senior at A1) and subsidiaries on review for possible upgrade.
Moody's actions follow the announcement that Wachovia has signed
a definitive agreement to acquire Golden West for approximately $25.5
billion. Wachovia intends to finance the deal with approximately
23% cash and 77% stock.
Moody's stated that on a risk-adjusted basis, Golden
West's profitability and asset quality performance is above the
median for similarly-rated banks and is superior to banks rated
Aa2, which includes Wachovia. Therefore, the inclusion
of Golden West's operations should moderately improve Wachovia's
core profitability. However, in the event Golden West's
operations did deteriorate under Wachovia's ownership, the
slippage should be moderate, and not likely to result in negative
rating pressure on Wachovia's rating, said Moody's.
That conclusion supports the affirmation of Wachovia's ratings.
Moody's said that the most likely cause for slippage in Golden West's
performance under Wachovia's ownership would be a reduced focus
on the key adjustable-rate mortgage (ARM) business of Golden West.
"The reduced focus could come from Wachovia's attempt to broaden
Golden West's platform or from managerial attrition at Golden West
beyond its senior management team," said Moody's Senior
Vice President Sean Jones. With that said, Wachovia has acknowledged
the unique business model of Golden West and intends to maintain it.
Golden West specializes in originating and funding first-lien-adjustable-rate
mortgages which are very profitable products on a risk-adjusted
basis. Mr. Jones added, "Demand for such mortgages
fluctuates with changes in interest rates. But, thanks to
its excellent execution of its narrow business model, Golden West
has a long-term record of originating sufficient amounts of monthly-adjustable-rate
mortgages in all interest rate environments while maintaining very strong
asset quality performance." An easing in Golden West's
strong underwriting and appraisal practices could impair the key credit
attributes that Golden West currently holds.
However, even if that focus is compromised, Moody's
believes it should not result in a major disruption to Wachovia's
consolidated performance. Positively, Moody's noted
that if Wachovia assimilates Golden West well, it could result in
an improvement in Wachovia's long-term profitability performance,
an area where the firm has lagged more highly rated peers.
Regarding future rating drivers for Wachovia, Moody's said
upward rating pressure could result from an increase in Wachovia's
core profitability mirroring higher-rated US banks. In the
first quarter 2006, Wachovia's core profitability (earnings
before taxes and provisions minus consumer charge-offs over risk-adjusted-managed
assets) equaled approximately 2.45%. Wachovia has
reported steady improvement in this measurement, said Moody's,
but it is still approximately 60 basis points below that of the median
for higher-rated US banks. Moody's stated that Wachovia's
comparatively low capital ratios could also be a constraint to a higher
rating. Wachovia's ratio of adjusted tangible common equity
to risk-adjusted-managed assets equals approximately 5.9%,
while the median for similarly-rated banks equals approximately
6.6%. Wachovia's ratio takes into account the
75% equity credit Moody's gave to Wachovia's WITS securities.
Moody's said that an unexpected loosening of credit standards,
a sustained fall in core profitability to 2% or less of risk-adjusted-managed
assets, or risky acquisitions, could create downward rating
pressure for Wachovia's ratings. Moody's said that
the proposed Golden West acquisition did not fall into the category of
a risky acquisition.
In reviewing Golden West's ratings, Moody's said that
it will focus on whether the deal is consummated and the resulting legal
organization structure. If finalized, Golden West's
ratings should mirror Wachovia's ratings. Wachovia Corporation's
senior debt is rated Aa3 while Wachovia Bank's financial strength
rating is B+, and it is rated Aa2 for deposits.
The following ratings are the key long-term ratings under review
for possible upgrade. World Savings Bank, FSB's short-term
ratings of Prime-1 are affirmed.
World Savings Bank, FSB
-Financial strength rating at B
-Long-term deposits at Aa3
-Issuer and long-term OSO at Aa3
Golden West Financial Corporation
-Senior debt at A1
-Senior shelf rating of (P) A1
-Subordinate shelf rating of (P) A2
Wachovia is headquartered in Charlotte, NC and its reported assets
at March 31, 2006 were $542 billion. Golden West is
headquartered in Oakland, CA. Its reported assets at March
31, 2006 were $128 billion.
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service
No Related Data.
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