(Adds details, share movement)
Sept 9 (Reuters) - Merrill Lynch downgraded Wachovia Corp WB.N to "underperform" from "neutral" as it expects higher credit losses, loan loss provisions and lower fee income at the fourth-largest U.S. bank.
Merrill expects Wachovia to post a third-quarter loss of 10 cents a share, compared with a prior forecast for a profit of 28 cents a share.
The third-quarter outlook reflects weak retail brokerage revenue, impairment charges tied to certain capital markets and auction rate securities, and expectation of a loss on the sale of preferred securities of Fannie Mae FNM.N and Freddie Mac FRE.N.
"Based on our conversations with management, we believe it is reasonable to assume Wachovia sold all of is GSE preferred equity exposure prior to 9/8/08," analyst Edward Najarian wrote in a note to clients.
Merrill widened its 2008 loss-per-share estimate on Wachovia and cut 2009 and 2010 earnings-per-share estimates. It lowered its price objective on Wachovia's stock to $16 from $18.
The forecast cut reflects a modestly higher credit loss outlook due to higher commercial and industrial, and commercial real estate, loan losses, and a lower estimate for brokerage, investment banking, trading and commercial mortgage-backed securities revenue.
While most of Wachovia's credit weakness has been driven by the rapid decline in its option adjustable-rate mortgage loan portfolio -- inherited through its purchase of California lender Golden West Financial Corp -- it is also important to note that its commercial loan portfolio is deteriorating faster than those of the other major banks, analyst Najarian said.
Wachovia's total commercial delinquent and non-accrual loans increased by 722 percent on a year-over-year basis and 53 percent on a linked-quarter basis, the analyst said.
SELLING NON-CORE ASSETS
Najarian also expressed concern that Wachovia's credit loss ratios and loan loss provisions could materially exceed investor expectations, causing the firm to significantly miss consensus earnings-per-share estimates.
Wachovia will most likely be able to work its way through the remainder of the credit cycle without issuing any additional common or convertible preferred equity, but it may need to sell certain non-core businesses to enhance capital ratios, the analyst added.
Speaking at a Lehman Brothers Inc financial services conference on Tuesday, Wachovia's chief executive, Robert Steel, said the bank is looking to sell non-core assets worth "hundreds of millions of dollars." [ID:nN09254644]
Steel is trying to restore profits and slash costs following Wachovia's ill-timed $24.2 billion purchase of Golden West in October 2006. Wachovia, based in Charlotte, North Carolina, lost a record $9.11 billion in the second quarter.
Shares of the company were trading down more than 8 percent at $17.44 in morning trade on the New York Stock Exchange. They touched a low of $16.87 earlier in the session.
The following table lists the EPS estimate changes for Wachovia:
2008 EPS outlook 2009 EPS outlook 2010 EPS outlook
NEW OLD NEW OLD NEW OLD
-$1.60 -$1.00 $1.40 $1.80 $2.20 $2.35 (Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Pratish Narayanan, Himani Sarkar)