Sovereign to book $1.6B in 4th-quarter charges

January 14, 2008 10:12:35 AM PST
Sovereign Bancorp Inc. said Monday that it expects to take $1.6 billion in charges for the fourth quarter, as customers defaulted on loans and its investment in a New York thrift yielded lower-than-expected revenue and profits. Its shares fell more than 4 percent in midday trading. Philadelphia-based Sovereign said it will incur a $1.4 billion writedown for the last quarter, including $800 million from the June 2006 purchase of Independence Community Bancorp in Brooklyn - a deal opposed by several major shareholders. Sovereign said earnings, revenue and deposit growth for the thrift have been lower than expected.

About $600 million of the charges is focused on Sovereign's consumer sector, where credit has been deteriorating and bank valuations have dropped. Sovereign also stopped originating auto loans in the Southeast and Southwest, adding to the impairment charge.

A continued deterioration of the housing market and rising defaults on home loans have taken a toll on many financial institutions. They also led to a tightening credit environment, as lenders become more strict about borrower qualifications.

"Conditions will be very difficult for banks in 2008," said Lee Calfo, an analyst at Boenning and Scattergood Inc. "I don't think this is the end of it."

Joseph Campanelli, chief executive of Sovereign, said in a statement that Sovereign is "fundamentally sound" and its own forecasts show that the thrift will stay well-capitalized even if industry conditions get worse.

He also said Sovereign is "rigorously reviewing its business lines" for profitability, and that they meet the company's strategic business goals.

Also in the fourth quarter, Sovereign will book $180 million in noncash charges related to the decline in value of its Fannie Mae and Freddie Mac preferred shares. Another $27 million in pretax charges will come from losses on financing Sovereign provided to two unspecified mortgage companies that have defaulted on certain agreements.

In addition, the thrift boosted its reserves for loan and lease losses by $88 million, to $738 million. This is an amount set aside by financial institutions as a buffer against bad debt.

In the fourth quarter, Sovereign actually set aside $148 million to put in the loan-loss reserve - it's a recurring item - but bad debt came to $60 million. Thus, Sovereign was able to increase its loan loss reserve by a net $88 million on its balance sheet.

Calfo said the loan-loss provision was "substantially" higher than what analysts expected. He said Sovereign also booked a big reserve of $162.5 million in the third quarter, which was much higher than the $51 million in the second quarter.

Sovereign will report fourth-quarter earnings on Jan. 23 after the market closes.

Shares of Sovereign fell 48 cents, or 4.5 percent, to $10.20 in midday trading Monday.