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BANGALORE, July 15 (Reuters) - Wachovia Corp's WB.N earnings outlook has dramatically diminished and prospects for shareholders are bleak, said influential Wall Street analyst Meredith Whitney, who downgraded the stock to "underperform."
Wachovia shares, which have slumped 75 percent this year, fell as much as 20 percent in morning trade on Tuesday following the downgrade.
Oppenheimer analyst Whitney's report comes a day after the shares of major U.S. banks plunged amid concerns over stability in the sector and the future of the mortgage market.
The analyst, who correctly predicted a dividend cut at Citigroup (C.N) last year, said U.S. banks' valuations on mortgage-related assets were "too high" and need to be quickly addressed to stabilize the financial markets.
Whitney, who slashed her rating on Wachovia from "perform," said capital was the main concern for the fourth-largest U.S. bank.
With a shrinking portfolio, Wachovia simply cannot cut costs fast enough to reduce capital erosion, she wrote in a note to clients. She expects Wachovia to have reduced its portfolio by $50 billion in the second quarter.
Whitney, who expects Wachovia to post losses in 2008 and 2009, said total provision for loan losses in the second quarter will be $9.5 billion. The bank will post negative loan growth in 2008 and 2009, she said.
Banks stocks are headed lower until asset valuations "get real," Whitney said, adding mortgage-asset values need to be quickly adjusted on the books to reflect true prices.
"We are hard pressed to find examples of financial companies that have successfully shrunk their businesses," she said.
The analyst said Wachovia's assumptions on housing price declines on its entire mortgage portfolio were "too aggressive," while Bank of America Corp (BAC.N) was relatively more conservative.
U.S. banks have so far written off billions of dollars in mortgage-related losses and were forced to raise capital, often diluting shareholders, as the subprime flu spread across an array of debt securities.
Wachovia raised $8 billion in capital and slashed its dividend by more than 40 percent, after incurring heavy losses from its mortgage bets.
The company hired Robert Steel as its chief executive last week after ousting its previous CEO Ken Thompson last month.
Wachovia's shares recovered their early losses and were trading down 6 percent at $9.27 on the New York Stock Exchange. The broader KBW bank index .BKX was up nearly 2 percent. (Reporting by Sweta Singh, Dinesh Nair in Bangalore; Editing by Vinu Pilakkott, Anil D'Silva)