If you were looking for good news from Wachovia (NYSE: WB ) or National City (NYSE: NCC ) , the probabilities were heavily weighted against you. Both banks reported fourth-quarter results that were not just down versus last year, they were downright ugly. National City finished the quarter with a loss of $333 million, and though Wachovia was still profitable, the $51 million of net income it reported was hardly consoling.
It's been a very similar story throughout the banking industry, whether you look at Citigroup (NYSE: C ) , Merrill Lynch (NYSE: MER ) , Wells Fargo (NYSE: WFC ) , or any number of other banks. The deterioration of the real estate market has reverberated through the market and is leading to huge writedowns on the value of mortgages and mortgage-backed securities. At the same time, interest margins in the industry have been squeezed, further dampening results.
The outlook hasn't provided much comfort, either. The 75 basis points that the Fed slashed from its target rate should help some, but there's no guarantee that this will lead to a huge jump in the interest margin. Meanwhile, investors of all stripes have very little visibility into whether more writedowns are on the way, and recessionary pressure on consumers will likely lead to further pressure on the consumer side of the banking business.
For the quarter, Wachovia's losses were led by a $1.7 billion writedown and a $1.5 billion provision for credit losses. The largest contributor to the bank's writedown was a $1 billion loss on subprime asset-backed securities, though its commercial mortgage structured products added an impressive $600 million to that loss. National City's losses stemmed primarily from provisions for credit losses of $691 million -- up 88% from the prior quarter and more than double the losses in Q4 2006.
The big question on these two -- and really all of the financials -- is whether we're looking at some screaming deals or whether stocks will keep falling indefinitely. The bottom line is that it's going to be tough for individual investors to accurately gauge the present value of what's remaining on a given bank's balance sheet, or exactly where the economy is going. So to some extent, it's a leap of faith to invest in most of the major financials right now. However, going with the highest quality companies with the best management and having a sufficiently long investment horizon should do a lot to shift the odds in your favor.
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