Citi Cuts Wachovia Estimates, Target

Citi has slashed Wachovia’s estimates and target price by $3.00 and $0.65 to $25 and $2.60, citing concerns over the bank’s ARM portfolio:

Going into 1Q, there were concerns about Wachovia’s option ARM portfolio, but it came in worse than expected and continues to be the key issue for Wachovia. A very large 14% of the portfolio now has LTV over 100%, which is very suprising given that 98% of portfolio had less than 80% LTV origination and average LTV was 71% – The pace of deterioration has been significantly more than expected.

The Bear case is that Wachovia did not raise enough capital as the embedded losses in the option ARM portfolio are much higer than the assumed 7-8%. With the housing market likely to remain challenging in near term, we have trouble seeing Wachovia significantly outperforming in the near term. We continue to believe it is too early to be aggressively building positions in this name, and would wait for a better entry point.

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