New York, July 22, 2008 -- Moody's Investors Service downgraded its ratings on Wachovia Corporation
(senior debt to A1 from Aa3) and on its lead bank, Wachovia Bank
N.A. (financial strength rating to B from B+ and long-term
deposits to Aa2 from Aa1). Wachovia's Prime-1 short-term
ratings were affirmed. Wachovia Bank N.A.'s
deposit and debt ratings benefit from a one notch lift because Moody's
believes the bank enjoys high systemic support. Following the downgrade,
Moody's maintained a negative outlook on Wachovia's ratings.
Moody's said that the downgrade and negative outlook were driven
mainly by a sizable increase in its loss expectations on Wachovia's
$122 billion adjustable-rate-mortgage (option-ARM)
portfolio. Previously, Moody's ratings on Wachovia
incorporated base life-time losses of $8.5 billion
on the option-ARM portfolio. Now, the rating incorporates
base life-time losses on this portfolio of approximately $16
billion. The provisioning associated with Moody's loss estimates
raises the possibility that Wachovia could report losses into 2009.
Moody's believes that Wachovia has the pre-provision earnings
and capital resources to absorb these losses and still maintain "well-capitalized"
regulatory capital levels. However, reporting losses over
this extended period, coupled with the recent significant capital
markets volatility, has reduced Wachovia's financial flexibility
to take initiatives to fully replenish its capital should there be other
unexpected events.
Moody's added that the negative outlook reflects that the option-ARM
portfolio has become a particularly volatile asset class for Wachovia
and constitutes 25% of its loans. The portfolio is sensitive
to home price depreciation and an additional increase to Moody's
loss expectations cannot be ruled out.
In explaining the increase in the base life-time loss assumption,
Moody's stated that previous loss expectations were subjectively
moderated because the portfolio historically produced minimal losses even
in periods of home price depreciation and job losses. Given the
portfolio's recent performance, Moody's no longer believes
this is appropriate. Therefore, the updated life-time
expected losses are driven by the same framework as for others'
mortgage portfolios.
Factors that contribute to the sizable expected life-time losses
for Wachovia's option-ARM portfolio include 1) substantial
home price depreciation in major markets -- 68% of the portfolio
is in the problematic markets of California and Florida, 2) over
55% of the portfolio was originated in 2006 or 2007, vintages
in which losses have been appreciably higher, 3) a high percentage
of the portfolio was brokered even though it was underwritten internally
at the fully indexed rate, and 4) the average FICO score of 661
hovers just above subprime.
"Falling home values have undermined a historical strength of the
portfolio, which was its sound appraisal process," said
Moody's Senior Vice President Sean Jones. "With home
prices falling sharply, and with more customers having no equity
in their homes, more loans are defaulting, and there is greater
severity of loss on those loans that default," added Mr.
Jones.
Moody's stated that, as with other banks, Wachovia's
ratings also incorporate life-time loss expectations on Wachovia's
commercial real estate portfolio and further marks against assets in its
investment banking operations, as well as lower net earnings because
of higher loan loss provisions in other asset classes such as auto loans.
Nevertheless, the rating agency emphasized that the great majority
of expected losses incorporated in the current ratings stem from Wachovia's
option-ARM portfolio.
Moody's believes Wachovia's recent capital initiatives help
support its ratings. These include raising $8.05
billion of capital during the second quarter of 2008 and its announcement
today that it will cut its dividend from $840 million a quarter
to $100 million. These initiatives increase the comfort
that Wachovia's regulatory "well-capitalized"
levels will not be breached even if life-time losses on the option-ARM
portfolio were 40% higher than Moody's base line expected
loss of $16 billion. The dividend initiative also means
the robust liquidity profile of Wachovia Corporation is further improved.
Wachovia recorded a $6.1 billion non-cash goodwill
impairment charge that contributed to the $8.7 billion net
operating loss in the second quarter of 2008. Moody's said
that the charge had no impact on our liquidity and capital analysis of
Wachovia. Moody's evaluates capital by excluding goodwill.
Moody's said its ratings on Wachovia are supported by a robust liquidity
profile at both the holding company and at the bank. Wachovia's
cash position at the holding company is large, allowing it to meet
potential cash obligations into 2011 even if it received no dividends
from its bank subsidiaries. Moody's also believes that Wachovia
Bank is a net overnight lender into the system as opposed to being a net
overnight borrower. In addition, Wachovia Bank has sizable
unutilized capacity at the Federal Home Loan Banks.
Moody's cited Wachovia's still enviable direct banking franchise
centered on the East Coast of the United States as a rating strength.
Regarding U.S. deposits, Wachovia is the third largest
U.S. bank, and its market share on the East Coast
is high.
Ratings downgraded were:
Downgrades:
..Issuer: Central Fidelity Capital Trust I
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: Congress Financial Capital Company
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: CoreStates Capital I
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: CoreStates Capital II
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: CoreStates Capital III
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: First Fidelity Bancorporation
....Preferred Stock Preferred Stock,
Downgraded to A3 from A2
..Issuer: First Union Capital I
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: First Union Capital II
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: First Union Capital III
....Preferred Stock Shelf, Downgraded
to (P)A2 from (P)A1
..Issuer: First Union Institutional Capital I
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: First Union National Bank of Florida
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: Golden West Financial Corporation
....Issuer Rating, Downgraded to A1
from Aa3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Meridian Bancorp, Inc.
....Multiple Seniority Shelf, Downgraded
to (P)A3, (P)A2 from (P)A2, (P)A1
..Issuer: South Carolina National Corporation
....Subordinate Medium-Term Note Program,
Downgraded to A2 from A1
..Issuer: SouthTrust Bank
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: SouthTrust Bank of Georgia, N.A.
(Old)
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
..Issuer: SouthTrust Corporation
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
..Issuer: Wachovia Bank, N.A.
....Bank Financial Strength Rating,
Downgraded to B from B+
....Issuer Rating, Downgraded to Aa2
from Aa1
....OSO Senior Unsecured OSO Rating,
Downgraded to Aa2 from Aa1
....Multiple Seniority Bank Note Program,
Downgraded to Aa3, Aa2 from Aa2, Aa1
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, Aa2 from Aa2, Aa1
....Subordinate Bank Note Program, Downgraded
to Aa3 from Aa2
....Subordinate Conv./Exch.
Bond/Debenture, Downgraded to Aa3 from Aa2
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
....Senior Unsecured Bank Note Program,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Note/Takedown,
Downgraded to Aa2 from Aa1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to Aa2 from Aa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Rating,
Downgraded to Aa2 from Aa1
..Issuer: Wachovia Bank, N.A.
(Old)
....Senior Unsecured Bank Note Program,
Downgraded to Aa3 from Aa2
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: Wachovia Capital Trust I
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: Wachovia Capital Trust II
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: Wachovia Capital Trust III
....Preferred Stock Preferred Stock,
Downgraded to A3 from A2
....Preferred Stock Shelf, Downgraded
to (P)A2 from (P)A1
..Issuer: Wachovia Capital Trust IV
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: Wachovia Capital Trust IX
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Capital Trust V
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
..Issuer: Wachovia Capital Trust VII
....Preferred Stock Shelf, Downgraded
to (P)A2 from (P)A1
..Issuer: Wachovia Capital Trust VIII
....Preferred Stock Shelf, Downgraded
to (P)A2 from (P)A1
..Issuer: Wachovia Capital Trust X
....Preferred Stock Preferred Stock,
Downgraded to A2 from A1
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Capital Trust XI
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Capital Trust XII
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Capital Trust XIII
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Capital Trust XIV
....Preferred Stock Shelf, Downgraded
to (P)A2 from (P)A1
..Issuer: Wachovia Capital Trust XV
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
..Issuer: Wachovia Corporation
....Junior Subordinated Shelf, Downgraded
to (P)A2 from (P)A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to A2, A1 from A1, Aa3
....Multiple Seniority Shelf, Downgraded
to (P)A3, (P)A1 from (P)A2, (P)Aa3
....Preferred Stock Preferred Stock,
Downgraded to A3 from A2
....Preferred Stock Shelf, Downgraded
to (P)A3 from (P)A2
....Subordinate Medium-Term Note Program,
Downgraded to A2 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to A1 from Aa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to A1 from Aa3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Wachovia Corporation (Old)
....Multiple Seniority Shelf, Downgraded
to (P)A2, (P)A1 from (P)A1, (P)Aa3
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Subordinated Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Wachovia Preferred Funding Corp.
....Preferred Stock Preferred Stock,
Downgraded to A3 from A2
..Issuer: Western Financial Bank, F.S.B.
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: World Savings Bank, FSB
....Bank Financial Strength Rating,
Downgraded to B from B+
....Issuer Rating, Downgraded to Aa2
from Aa1
....OSO Senior Unsecured OSO Rating,
Downgraded to Aa2 from Aa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Rating,
Downgraded to Aa2 from Aa1
Outlook Actions:
..Issuer: Central Fidelity Capital Trust I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Congress Financial Capital Company
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: CoreStates Capital I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: CoreStates Capital II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: CoreStates Capital III
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Fidelity Bancorporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Union Capital I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Union Capital II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Union Capital III
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Union Institutional Capital I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: First Union National Bank of Florida
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Golden West Financial Corporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Meridian Bancorp, Inc.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: South Carolina National Corporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SouthTrust Bank
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SouthTrust Bank of Georgia, N.A.
(Old)
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SouthTrust Corporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Bank, N.A.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Bank, N.A.
(Old)
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust III
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust IV
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust IX
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust V
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust VII
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust VIII
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Capital Trust X
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Corporation
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Corporation (Old)
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Wachovia Preferred Funding Corp.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Western Financial Bank, F.S.B.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: World Savings Bank, FSB
....Outlook, Changed To Negative From
Rating Under Review
Wachovia Corporation is headquartered in Charlotte NC. Its reported
assets as of June 30, 2008 were $812 billion.
New York
Sean Jones
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's cuts Wachovia's ratings (snr to A1); outlook negative
