DBRS Confirms Wachovia Corporation at AA (low); Trend Stable

DBRS has today confirmed the ratings of Wachovia Corporation (Wachovia or the Company) and related entities with a Stable trend, including the Company’s Issuer & Senior Debt rating at AA (low) and its Short-Term Instruments rating at R-1 (middle).

The confirmation follows the Company’s announcement of a first quarter 2008 net loss of $350 million, primarily due to a $2.1 billion reserve build and $1.6 billion in market disruption losses related to the Company’s Leveraged Finance, CMBS, RMBS and CDO exposures. The large reserve build was primarily driven by a refinement to the Company’s reserve estimates reflecting the impact of changing customer behaviors being experienced in today’s declining housing market. The changes particularly address loans in geographic areas that have recently experienced significant declines in housing values and those that are expected to decline in the near future. To put these credit and market disruption costs into perspective, the Company produced $11.6 billion of income before provisions and taxes in 2007, which is expected to increase in 2008 and 2009.

The ratings confirmation reflects Wachovia’s strong, diverse franchise, recurrent core earnings, its strong financial profile and its still sound, albeit weakening, asset quality. DBRS positively views the Company’s proposed substantial strengthening of capital through equity issuance and a dividend reduction that will increase capital generation. Wachovia’s historical capital levels reflected a lower risk profile that has now been adjusted to reflect revised performance expectations for its loan portfolio. DBRS notes that while the losses and the major provision increase will likely weigh on 2008 and 2009 earnings, Wachovia can absorb these events, given its revenue diversification and resilient earnings power.

DBRS continues to monitor how Wachovia and its peers cope with the current market dislocation, particularly in securitization and credit markets. The Company experienced significant asset deterioration in Q108, with non-performing assets (NPAs) rising to 1.70% of loans (excluding held for sale) from 1.14% in Q407, and net charge-offs up 25 basis points to 0.66% of average loans compared with Q407. Pick-a-Payment Mortgages, the Company’s unique option ARM product, accounted for 26% of total loans, but 55% of NPAs, demonstrating the heightened risk for loans in areas that have had significant declines in valuation, particularly California. While commercial credit has also deteriorated somewhat, home equity and auto lending have performed relatively well, reflecting tightening and more conservative underwriting.

Exposure to ABS CDOs, subprime RMBS, CMBS and leveraged loans continues to be aggressively reduced through write-downs and sales. While significantly marked down, these amounts could still constrain earnings until capital markets normalize, which may be in the medium rather than the near term.

DBRS believes that Wachovia is relatively well positioned to ride out the difficult environment with sound liquidity, recurrent core earnings and a conservative approach to risk which support the Stable trend. DBRS would view accelerated credit quality deterioration in excess of management’s current view negatively.

Note:
All figures are in U.S. dollars unless otherwise noted.