Wells Fargo & Co., the biggest U.S. bank by stock-market value, may need to raise $10 billion and cut its dividend after the acquisition of Wachovia Corp., wrote Atlantic Equities analyst Richard Staite.
Staite, based in London, downgraded Wells Fargo to "underweight" from "neutral" Wednesday and said the bank may announce disappointing earnings this year because of the deteriorating economy. Wells Fargo reports fourth-quarter earnings on Jan. 28.
"With the accelerating decline in house prices in California and surge in unemployment we expect them to suffer significant losses in 2009," Staite wrote. "Given the weak economic outlook, there is a chance the dividend could be cut as a way to conserve capital."
Wells Fargo's shares have outperformed those of its top competitors, including J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp., in the past year because the company avoided most of the riskiest loans during the credit bubble.
Dividend rose last year
The San Francisco-based bank bolstered its quarterly dividend by 10 percent in 2008 to 34 cents a share, while New York-based Citigroup and Charlotte, N.C.-based Bank of America slashed theirs.
Wells Fargo spokeswoman Julia Tunis Bernard said the company doesn't comment on analyst reports.
The bank, whose biggest shareholder is Warren Buffett's Berkshire Hathaway Inc., completed the $12.7 billion purchase of Charlotte, N.C.-based Wachovia on Jan. 1. In the three months since the companies agreed to the deal, economists' average for unemployment have risen to 8 percent by the third quarter from 6.2 percent, Bloomberg surveys show.
Moody's Investors Service cut Wells Fargo's debt rating to Aa3 from Aa1 on Jan. 6 on concern that the Wachovia deal will hurt earnings. The deal "significantly weakened" Wells Fargo's capital position, Moody's said.
Staite wrote Wednesday that Wells Fargo's capital ratios have "deteriorated significantly" because of the acquisition.
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