UPDATE 2-Merrill cuts Wachovia to underperform

(Adds details, share movement)

Sept 9 (Reuters) - Merrill Lynch downgraded Wachovia Corp
WB.N to "underperform" from "neutral" as it expects higher
credit losses, loan loss provisions and lower fee income at the
fourth-largest U.S. bank.

Merrill expects Wachovia to post a third-quarter loss of 10
cents a share, compared with a prior forecast for a profit of
28 cents a share.

The third-quarter outlook reflects weak retail brokerage
revenue, impairment charges tied to certain capital markets and
auction rate securities, and expectation of a loss on the sale
of preferred securities of Fannie Mae (FNM.N) and Freddie Mac
(FRE.N).

"Based on our conversations with management, we believe it
is reasonable to assume Wachovia sold all of is GSE preferred
equity exposure prior to 9/8/08," analyst Edward Najarian wrote
in a note to clients.

Merrill widened its 2008 loss-per-share estimate on
Wachovia and cut 2009 and 2010 earnings-per-share estimates. It
lowered its price objective on Wachovia's stock to $16 from
$18.

The forecast cut reflects a modestly higher credit loss
outlook due to higher commercial and industrial, and commercial
real estate, loan losses, and a lower estimate for brokerage,
investment banking, trading and commercial mortgage-backed
securities revenue.

While most of Wachovia's credit weakness has been driven by
the rapid decline in its option adjustable-rate mortgage loan
portfolio -- inherited through its purchase of California
lender Golden West Financial Corp -- it is also important to
note that its commercial loan portfolio is deteriorating faster
than those of the other major banks, analyst Najarian said.

Wachovia's total commercial delinquent and non-accrual
loans increased by 722 percent on a year-over-year basis and 53
percent on a linked-quarter basis, the analyst said.

SELLING NON-CORE ASSETS

Najarian also expressed concern that Wachovia's credit loss
ratios and loan loss provisions could materially exceed
investor expectations, causing the firm to significantly miss
consensus earnings-per-share estimates.

Wachovia will most likely be able to work its way through
the remainder of the credit cycle without issuing any
additional common or convertible preferred equity, but it may
need to sell certain non-core businesses to enhance capital
ratios, the analyst added.

Speaking at a Lehman Brothers Inc financial services
conference on Tuesday, Wachovia's chief executive, Robert
Steel, said the bank is looking to sell non-core assets worth
"hundreds of millions of dollars." [ID:nN09254644]

Steel is trying to restore profits and slash costs
following Wachovia's ill-timed $24.2 billion purchase of Golden
West in October 2006. Wachovia, based in Charlotte, North
Carolina, lost a record $9.11 billion in the second quarter.

Shares of the company were trading down more than 8 percent
at $17.44 in morning trade on the New York Stock Exchange. They
touched a low of $16.87 earlier in the session.

The following table lists the EPS estimate changes for
Wachovia:

2008 EPS outlook 2009 EPS outlook 2010 EPS
outlook

NEW OLD NEW OLD NEW
OLD

-$1.60 -$1.00 $1.40 $1.80 $2.20
$2.35
(Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by
Pratish Narayanan, Himani Sarkar)