Bank Stocks Plunge Amid Earnings Warnings, Increase in Bad Loans

Thank you, Mr. Greenspan.

That may be what bitter shareholders of banking giant Wachovia Corp. were uttering Thursday, after the company warned that current-quarter earnings would be lower than expected--in part because of increasing numbers of bad loans in a slowing economy.

Ditto for shareholders of UnionBanCal, the San Francisco-based holding company for Union Bank. The firm said late Thursday that its bad loans, too, are increasing and will hurt earnings near term.

Winston-Salem, N.C.-based Wachovia’s shares (ticker symbol: WB) tumbled $13.13 to $57.06 and dragged most other bank stocks down sharply as well.

UnionBanCal (UB) fell $1.81 to $28.69 before its announcement.

The Federal Reserve, under Chairman Alan Greenspan, has been raising interest rates over the last year to slow the economy and restrain inflation. The Fed wants a slowdown, not a recession. Yet the two bank announcements Thursday reminded investors that even a slowdown may cause pain throughout the economy.

Wachovia said rising interest rates have slowed revenue growth in its capital markets, investment and mortgage businesses. The bank also said it will boost reserves against bad loans by $200 million.

Wachovia Chief Financial Officer Robert S. McCoy Jr. said bad loans have increased by $70 million this quarter, mainly because of loan repayment problems among a handful of corporate customers as the economy has slowed. He said the $200-million set-aside should cover any additional deterioration in the company’s loan portfolio.

The bank has for years been considered among the most careful of U.S. lenders, so the specter of an increase in bad loans has rattled investors, analysts said.

“Wachovia has always been perceived to be very, very clean on the credit quality side. If Wachovia’s borrowers are having trouble, what about the more aggressive lenders?” said Thomas Finucane, a money manager for John Hancock Advisers Inc.

Merrill Lynch, among other brokerages, cut earnings estimates for Wachovia, slashing its second-quarter estimate to 69 cents a share from $1.33.

UnionBanCal, meanwhile, said it will set aside an additional $70 million to cover bad loans. That will reduce operating earnings this quarter to between 77 cents and 82 cents a share, compared with the 88 cents analysts generally expected.

Other bank stocks down sharply Thursday included Bank of America (BAC), down $3.38 to $51.94; First Union (FTU), down $2 to $28.88; SunTrust (STI), down $4.31 to $53.88; Wells Fargo (WFC), down $2.50 to $42.06; and Imperial Bancorp (IMP), down $1.75 to $16.88.

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Wachovia Drops a Bomb

Shares of Wachovia Corp., a major Southeastern bank, plunged nearly 19% on Thursday after the company warned of weaker profits, in part because of deteriorating loan quality. Weekly closes and latest on the New York Stock Exchange:

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Thursday: $57.06, down $13.13

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Source: Bloomberg News