Robert Steel, CEO of Wachovia Corp, the fourth largest bank in the United States.

Wachovia Corp reported a surprisingly large second-quarter loss Tues-day, deflating Wall Street's hopes that the big US banks are weathering the credit crisis well.

The bank said it lost US$8.86 billion, is slashing its dividend and eliminating 10,750 positions after losses tied to mortgages soared.

Even excluding one-time items, the results substantially missed analysts' estimates.

But by the afternoon its stock joined a modest Wall Street rally and rose as much as 13 per cent - after its shares sank to mid-1991 levels in premarket trading, and after Wachovia's new CEO Bob Steel said he plans to cut US$2 billion of expenses by the end of next year and sell parts of the fourth-biggest US bank.

Its shares rose $1.19, or 9 per cent, to US$14.37 in afternoon trading.

"Our reported results today are clearly a disappointing performance for which we take responsibility," said Steel on a conference call with analysts.

"We are serious about getting on top of these issues quickly and we believe we have a good grasp of the challenges facing the economy, the industry and Wachovia."

Expected loss

Three rating agencies - Moody's Investors Service, Standard & Poor's and Fitch Ratings - downgraded their ratings on Wachovia's debt, citing increased expectations of losses in the bank's mortgage portfolio and its reduced flexibility to raise new capital.

Wachovia said it lost the equivalent of $4.20 per share in the April to June period.

In the same timeframe last year, the bank earned US$2.34 billion, or US$1.22 per share.

Excluding $6.1 billion in write-downs to the value of its intangible assets and merger-related and restructuring charges of US$128 million, Wachovia lost US$2.67 billion, or US$1.27 per share.

Second quarter results include the bank's October acquisition of AG Edwards Inc, which the bank said the merger is proceeding as planned and is 40 per cent complete.

Analysts on average expected a loss of 78 cents per share on revenue of almost US$8.4 billion.

Earlier this month, the Charlotte-based bank had projected a US$2.6 billion to US$2.8 billion quarterly loss, equal to US$1.23 to US$1.33 per share, excluding goodwill items.

Head out of the sand

"Wachovia's new management has pulled its head out of the sand and is fully acknowledging the problems not challenges," said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm.

"While the company's wealth management, corporate and investment banks, and capital management groups all had more encouraging results than the general bank, the general bank is the bulk of Wachovia and it isn't performing well."

Wachovia cut its quarterly dividend to 5 cents per share from 37.5 cents, which will conserve approximately US$700 million of capital per quarter. In April, Wachovia slashed its dividend 41 per cent.

Steel, who replaced ousted Ken Thompson earlier this month, said it was "clearly prudent and necessary" to further cut the dividend.

"While this is a difficult decision, it is the best course for our shareholders over the long term," he said.

Steel said the company is moving to "sell selected non-core assets" and reduce the number of business customers who only use the bank for loans rather than other services. Wachovia expects to cut expenses during the second half of this year by US$490 million and then reduce 2009 spending by US$1.5 billion.