Weibo Corporation
Q3 2008 Earnings Call Transcript

Published: 22 Oct 2008

[Alice Lehman:]

Thank you for calling in to Wachovia’s third quarter 2008 pre-recorded earnings review call. This is Alice Lehman, Director of Investor Relations. Before you listen to the rest of this call, you may want to go to our website at wachovia.com/investor, and download the slide presentation we’ll be referring to throughout. Also on our website, you can obtain a copy of today’s earnings press release and tables and our supplemental quarterly earning report. In this call, we’ll review our third quarter financial highlights deck. In addition, this call will be available on our website through January 16, 2009, at 800-642-1687 for U.S. callers and 706-645-9291 for international callers - Conference ID

[Robert K. Steel:]

Thank you, Alice. Hello, and thank you for joining us today. I will turn it over in a moment to David Zwiener, our CFO and Ken Phelan, our Chief Risk Officer, to discuss our third quarter, but first let me say a few introductory words on our pending combination with Wells Fargo. Clearly, these are extraordinary times. While we are disappointed that Wachovia will not remain independent, we are enthusiastic about the prospects that lie ahead for a combination with Wells Fargo. When I arrived at Wachovia about three months ago, we immediately got to work addressing the well-known challenges on our balance sheet. We cut the dividend and were working hard to make adjustments to the balance sheet and reduce our expenses. While we were making progress on these initiatives, as everyone now knows, the market environment changed more precipitously than anyone had expected and we had to move quickly and in a different direction to act in the best interests of, and preserve value for all of our constituencies Our board approved the combination with Wells Fargo, and it’s an exciting combination. Wachovia’s shareholders will be owners of one of the world’s strongest financial institutions. It represents good value under the circumstances for our shareholders; it gives them upside in a stronger combined company; and it preserves the best of what is Wachovia and our culture. Wells Fargo is strong and stable and active in 80 different financial services businesses. Wells is number 1 in many areas including small business lending, agricultural lending and commercial real estate brokerage. It is number 2 in mortgage origination and servicing and debit cards and has the largest bank-owned insurance brokerage. In many ways, Wachovia is the mirror image of Wells Fargo. We are one of the nation’s largest diversified financial service companies, with a successful full service retail brokerage, a banking presence in 21 states and very strong core franchises. We are also the number one retail bank in the Southeast. I would also add that Wells Fargo is inheriting a strong, dedicated team here at Wachovia. During these difficult times, my colleagues have demonstrated that Wachovia always puts the interests of our customers and clients first. We at Wachovia have long respected Wells Fargo from afar and are confident that the combined organization will benefit from the marriage of their sales and cross-selling culture with our highly rated culture of customer service. Let’s just close our eyes and imagine what the combination of Wachovia and Wells Fargo will create

[David Zwiener:]

Thanks, Bob. Today, I’ll review our financial highlights, and then our Chief Risk Officer Ken Phelan, will discuss our loan portfolio and credit-related material. First let me say that, while I’ve been at Wachovia only a short time, it’s been long enough to understand the potential of this franchise, with its exceptional people, commitment to customer service and cross-sell excellence, compelling geographic and demographic footprint, and attractive product set. Because of our shared values, we’re enthusiastic about the opportunities ahead as we plan to join with our merger partner, Wells Fargo. Beginning with Slide 1, it is clear that our results this quarter were greatly impacted by increasing credit costs, market disruption losses, lower overall asset valuations and subdued market activity. Additionally, our GAAP results included the recognition of $18.8 billion pretax of noncash goodwill impairment, which reflected declining market valuations and the terms of the merger with Wells Fargo. On an operating basis we reported a loss of $4.8 billion, representing a loss of $2.23 per common share. In an attempt to provide clarity around the core trends driving these results, I will speak to our results excluding goodwill impairment, merger-related and restructuring expenses, intangible amortization, market disruption-related losses, our second quarter ’08 non-cash SILO charge and our principal investing results. On that basis, our revenue was down 8% on a linked quarter basis. Net interest income, which historically accounted for approximately 50% of our revenue, was down 5%, largely due to pressure from our capital and liquidity strategies, a deposit mix shift and higher non-performing assets, primarily in our Golden West Pick-a-Pay portfolio. Fees were down 10% excluding the principal investing and market disruption losses and while we saw growth in our traditional banking fees during the quarter, all market-related fees were lower on reduced origination activity and asset valuations. Our loan portfolio, excluding Golden West, which we refer to as our core portfolio, continued to perform relatively in line with our expectations. However, the worsening economic backdrop, deteriorating trends within the Pick-a-Pay portfolio, and an updated expectation for further house price declines resulted in our posting a provision expense of $6.6 billion during the quarter. This included a reserve build of $4.8 billion, 66% of which was attributable to the Pick-a-Pay portfolio, which Ken will cover in more detail later, but let me relate that the reserve now reflects a 22% cumulative loss expectation. Expenses were down 6% on a linked quarter basis, despite $497 million of costs relating to the previously announced auction rate securities settlement and reflected our initiatives to rationalize our business to the changing economic environment. Qualitatively, despite all the turmoil, our teammates in our traditional bank continued to focus on serving customers, as evidenced by growth in net new checking accounts, retail CDs, Way2Save product sales, growth in online customers and transaction dollar values, and annuity and investment management sales. Our retail brokerage team also remains focused on serving clients, and I’m pleased to report that we ended the quarter with the A.G. Edwards integration on track with stable financial advisor headcount. The success of this business’s customer-centric model can be seen in client assets, which have declined 16% since the merger versus a 24% decline in the S&P 500 over the same period. Slide 2 provides a more detailed account of our third quarter GAAP and operating loss. I’d like to make two points. First, regarding the goodwill impairment, about two-thirds of the impairment relates to our retail and small business sub-segment. In July, when explaining our second quarter goodwill impairment, which didn’t include impairment in the retail small business sub-segment, we told you that we were not likely to have impairment in this sub-segment. The unprecedented, almost unimaginable events of the third quarter and the consideration for our pending merger with Wells Fargo created a scenario that required goodwill impairment for that and other sub-segments which rendered our earlier prediction incorrect. We have a detailed explanation of the goodwill in the appendix to these materials. Second, you will note we have provided two views of net interest margin, both the GAAP view as well as the margin adjusted for our second quarter non-cash SILO charge, which shows a decline of 21 basis points in the margin during the quarter. I’ll provide further detail on the drivers of the decline shortly. Of course, we’d like you to see, as we do, the core earnings power of this franchise, and slide 3 lays out the notable items that reduce what otherwise would be a pre-tax, pre-provision bottom line of around $3 billion. We’ve outlined key items on this page that affected our results, and I’ll provide more detail on the market disruption losses later. For now, let me direct your attention to the table at the lower right where we lay out additional items that we believe are useful to note, as they put additional pressure on our results. The impact of the lower market valuations reduced our principal investing results by $446 million. Additionally, the capital and liquidity strategies that we detailed for you last quarter had the effect of replacing higher-yielding assets with lower-yielding assets and reduced net interest income by an estimated $100 million and the margin by 10 basis points. Also during the quarter we experienced a deposit shift mix which pressured the margin by 5 basis points, and the ongoing impact of rising NPAs, primarily in the Golden West portfolio, hurt the margin by 4 basis points. Combined, these items hurt core revenues by about $690 million in the quarter. Adjusting for these headwinds, our normalized results would be more in line with our pre-tax, pre-provision, pre-notable item results for the first two quarters of 2008. The next slide shows the impact on loan growth from our actions to preserve and protect capital. In addition to our capital efficiency strategies, which included securitization activity and reducing single service commercial exposures, our results reflect the realities of a tightening credit environment. We have deployed a number of strategies to appropriately reduce unfunded exposures. We did see the effect of slower prepayment speeds and some up-tick in utilization of credit lines rather than new originations. Specifically in our home equity portfolio, we saw utilization rise from 33% to 36% and in our large corporate book from 26% to 32%. Bob talked last quarter about our liquidity strategy regarding retail CDs. You can see the success of that strategy on slide 5, with 13% growth in average balances on a linked quarter basis. But results also reflect the effect of market turmoil on our deposit base. Overall, average core deposits were relatively stable, as consumer core deposit growth of 9% year over year and 4% on a linked quarter basis offset the sizable and abrupt end of quarter outflows in commercial core deposits. However, it’s important to point out that period-end core consumer deposits increased 6% year over year, net new checking account sales continued to be robust at 208,000 during the quarter, and our Way2Save campaign continued to exceed expectations. 41% generated a new checking account, and we ended the quarter with $328 million in new checking account balances as a result of this campaign. While we experienced significant pressure on our higher cost commercial deposits given the uncertainties following the WaMu announcement since quarter end we have begun to see our commercial deposit trends improve due to our clients’ confidence in our merger partner as well as excellent customer service in our global banking group. As you can see on slide 6, fee income was down significantly as unprecedented uncertainty in market conditions weighed heavily on valuations and overall activity levels. However, you can see that our traditional banking business continued to perform well, with fees in positive territory. I’ll go over the impact of market conditions on our market-related businesses next. Lower retail brokerage commissions on a linked quarter basis reflected a notable decline in daily transaction volumes which was felt industry-wide. Also, fiduciary and asset management fees reflected not only market pressures but the effect of a shift in brokerage from market funds to insured deposits. As I previously mentioned, principal investing losses were $310 million this quarter versus a gain of $136 million on a linked quarter basis and securities losses were approximately $2 billion, most of which were due to impairments. Now let’s turn to slide 7, where you can see that impairment losses in capital management and the parent drove market disruption-related losses in the third quarter. In our corporate and investment bank, losses of $940 million were up on a linked quarter basis despite lower distribution exposures and because of the lack of the second quarter benefit of $438 million on resolution of unfunded leverage finance positions, but these losses were down 40% from the first quarter. The losses in capital management were driven by impairment and trading losses of $851 million, relating largely to previously disclosed support of Evergreen Funds as well as auction rate security losses of $80 million. Securities impairment losses on the investment portfolio in the parent were $619 million. Also at the bottom of this table you can see the totals for legal costs and sundry expense attributed to our auction rate securities settlement with regulators. Turning to our businesses, beginning with the general bank on slide 8, let me direct your attention to the table at the bottom left which illustrates the general bank results excluding mortgage. You can see linked quarter and year over year that good sales momentum and strict attention to costs drove solid revenue and expense performance. However, this strength was more than offset by rising credit costs due to the worsening economy. I’m very impressed with the continued efforts of this team to serve our customers in the face of market pressures, and you can see this in the continued solid customer satisfaction and loyalty scores. The challenging conditions also affected our wealth management results, as you can see on slide 9. While the market turmoil led to deposit outflows, loans were stable and fiduciary and asset management fees and insurance commissions were higher. I’d also like to point out that while bottom line results were down on a linked quarter basis, they were up a solid 5% year over year due to this business’s adoption of a new managed account basis client model in 2007. Of course, hardest hit were the market-related businesses in our corporate and investment bank. As you can see on slide 10, expenses were up significantly, but we believe our expense reduction plans remain on track. FTE reductions exceeded our previous estimates. CIB was a key focus of our balance sheet reduction strategies, and they executed well against their target, despite market conditions that drove the increasing line utilizations at the end of the quarter. Turning to slide 11, our capital management business grew net interest income nicely on retail brokerage deposit growth and spread expansion. Fees suffered in the market turmoil, including the market disruption losses described earlier. But once again, we saw good expense discipline in capital management. Excluding auction rate securities costs, our retail brokerage posted an adjusted pre-tax margin of 25.8%. We’re extremely pleased to report solid progress in A.G. Edwards integration activity, which is now more than 50% complete. On a linked quarter basis, series 7 headcount remained stable, with an increase in more productive financial advisors. We also continued to see good cross-sell activity with general bank deposits in the quarter. Now let me turn this over to our Chief Risk Officer, Ken Phelan, for details on the loan portfolio and credit.

[Kenneth Phelan:]

Thanks, Dave. First off, I want to point out that while our credit costs are up significantly, reflecting continued weakness in the residential market and particular weakness in our Golden West portfolio, the balance of our portfolios appear fairly solid given the backdrop of the market and the rapid deterioration in the credit markets. As you can see from slide 13, total credit costs for the quarter were $6.6 billion, consisting of net charge-offs of $1.87 billion and an increase in our reserve of $4.8 billion. Of the total credit costs, nearly two-thirds or $4.2 billion related to the Golden West Pick-a-Pay portfolio

[David Zwiener:]

Thanks, Ken. Once again, this was a very challenging quarter in unprecedented times, but one thing remained clear