Obliterated Wachovia Upgraded to Neutral: May Still Need More Capital

Credit Suisse upgrades Wachovia (WB) from Underperform to Neutral and raises target to $30 from $23 following WB’s $8 billion capital raise and dividend cut. CS is confident that the additional capital as well as WB’s promise to slash its dividend will sufficiently strengthen the balance sheet.

[The capital raise] provides needed flexibility to navigate the challenging credit environment. Absent a more severe and protracted economic recession, management firmly believes it will remain adequately capitalised and not require additional capital.

The company has raised about $14B in total capital since December ’07 and the most recent $8B will bolster Tier 1 capital ratio by 150bps (est. 8.8% by YE 2009). While we believe that mgmt could have been more aggressive with the absolute size of the recent capital raise, we don’t discount the fact that the recent dividend cut will preserve an additional $2.1B annually-providing enough flexibility for the foreseeable future. Additionally, market-related disruption is waning and we are likely in the later innings of trading/inventory write-downs. While we view the recent capital posturing as a prudent strategic decision against the backdrop of an economic slowdown, we recognise that the company is not immune to further capital markets turmoil and credit quality deterioration-which could serve to erode the latest round of capital. It appears, however, that WB has sufficient capital to weather a modest recessionary environment without having to reduce the dividend further.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.

Tagged In