Morgan Keegan sees Wachovia cutting dividend further

BANGALORE (Reuters) - Morgan Keegan expects Wachovia Corp WB.N, which is struggling with mounting mortgage losses, to further reduce its dividend and raised concerns about the fourth-largest U.S. bank's capital adequacy.

Wachovia shares, which were hammered in the recent past, rose as much as 11 percent Tuesday, which analyst Robert Patten attributed to short covering.

The company's huge exposure to areas hard-hit by the housing crisis, especially California and Florida, is expected to lead to significant mortgage-related credit losses for the company, Patten said in a note to clients.

The risk to the stock's downside remains significant in the near-term as the underlying trends in the option asset-related mortgage portfolio continue to worsen, he said.

Wachovia shares have dropped by 32.1 percent since the company boosted its capital with an $8 billion stock issuance, compared with a 14.7 percent drop in the KBW bank index and a 2.2 percent gain in the S&P 500.

The analyst said the recent executive shakeup, though positive in the long term, will negatively affect the second-quarter earnings.

Last week Wachovia said it ousted Ken Thompson as chief executive, in the wake of mounting legal and regulatory troubles and an ill-fated purchase of a big mortgage lender.

The analyst also lowered his 2008 and 2009 earnings estimates for Wachovia.

Patten said he expects Wachovia's Pick-a-Pay portfolio to more closely resemble that of California peers, with net chargeoffs more than doubling to $240 million sequentially in the first quarter.

Wachovia shares pared some early gains and were trading up $1.48 at $20.37 in midday trade on the New York Stock Exchange.

(Reporting by Krishna Chaithanya in Bangalore; Editing by Gopakumar Warrier)